Scoring the Sparring Over EchoStar-DirecTV


Six months into the review of the proposed DirecTV Inc.-EchoStar Communications Corp. merger — and several hundred dialogues later — it's time to take stock.

To use a boxing metaphor, the pro-merger folks are wearing the white trunks, the anti-merger folks are wearing the red and, as of late April-early May, we're halfway through the match. So what's the score?


It would be hard to fairly assess the match thus far without saying that the early rounds have gone to the anti-merger folks. To the surprise (and chagrin) of the pro-merger folks, they've been roundly challenged by politicians, the media, analysts, and organizations one might never have expected.

The recent statement by the International Brotherhood of Teamsters in opposition to the merger is but one of many examples. The reaction of some U.S. Senators at a public hearing March 6 is another.

Yet on the opposite side, EchoStar and DirecTV claim, "It's not over 'til it's over" — and rightly so. By that Yogi Berra standard, many would say what's occurred thus far is not all that significant.

Politicians will politicize, opponents will position and, in the end, its impact on the real decision-makers — i.e., the lawyers and the economists at the Antitrust Division of the U.S. Department of Justice and the Federal Communications Commission — may be limited. So where does that leave us?


During the late spring and summer months, the politicians, media and pundits are likely to retire to their respective corners. Meanwhile, the DOJ and FCC will combine to thoroughly review the key legal, regulatory and economical issues from a quieter point in center ring.

Legally, DirecTV and EchoStar have yet to supply much substantial information, which is planned to refute filings and information supplied by opponents like the National Association of Broadcasters, the National Rural Telecommunications Cooperative and Pegasus Communication Corp.

According to DirecTV chairman and CEO Eddy Hartenstein, that information is coming "… on the topics they [the DOJ and FCC] asked for. We're just now beginning to establish our strongest presentations. We're very confident."

From an antitrust point-of-view, the proposed EchoStar-DirecTV merger reduces the key multichannel video programming distribution players in cabled areas from three to two, and in rural areas from two to one. This creates governmental concerns, like those in key recent court cases and the MCI WorldCom-Sprint Corp. decision.

Moreover, as the direct-broadcast satellite industry gains strength, size and momentum — it's now pushing almost 20 million subscribers — the quite valid "efficiency" arguments may actually work against the DirecTV-EchoStar combination. This is because the bigger a single entity gets, the greater its power over programming, hardware, marketing, and pricing choices — as well as over almost every aspect of its business and competition.

From an economic point of view, the anti-merger side has so far thrown the hardest punches, in as much as the EchoStar-DirecTV side has produced much less economic evidence to refute anti-monopoly data. Without this data, it may be difficult for the economists to set standards.

Because the burden of proof is on the merger proponents, this could be a critical deficiency. Thus far, the only pricing data supplied appears to come from the anti-merger side, which suggests within rural areas today, there are significant price differences. A key economist has stated that if the merger proceeds, in some rural areas prices may be 50 percent higher than today.

And across the ring, SES Americom Inc.'s April 25 announcement of its proposed new residential satellite service, which is looking for an FCC go-ahead during the summer months, could suggest just the kind of "competition" that the government so craves. This would no doubt be a good thing for the new EchoStar.


Coming back to the remaining rounds of the fight, there are other strong arguments propelling the merger. Taking duplicative channels off of one satellite, and then freeing that bandwidth for other content, could substantially grow the U.S. programming pie. It can also make DBS more competitive with cable (itself a huge monopoly), lower programming prices and bring new services like high definition television and broadband Internet access that much sooner to all U.S. satellite (and cable) subscribers.

By doing these things, the merger arguably helps the government's goal of avoiding a "digital divide" and creating strong competition for cable.

On the opposite side of the ring, in early March the FCC suspended its review, because it claimed EchoStar and DirecTV had not supplied adequate documentation. The review remains stalled today, which has led many to suspect such a delay has been purposefully timed by DirecTV and EchoStar, to ensure the final governmental decision comes after the November elections and after the negative politics that may come in the fall.

On the same side, recent robust subscriber and financial results from EchoStar and DirecTV also act to confuse the merger question, causing people to ask, "If the merger is so necessary for their businesses to survive, why are both players doing so well?"

Finally, there's a footnote in a recent FCC filing focused on EchoStar, noting its "disingenuous" actions — and perhaps suggesting that the company is going to have troubles in the months ahead if it continues to aggravate the bureaucrats at the FCC.


Many, who would never bet against [EchoStar chairman] Charlie Ergen in any ring where he's fighting, believe that a draw — in the form of an acceptance of the merger with conditions — will be the ultimate result. These observers believe that the FCC and DOJ, both controlled by pro-business Republican interests, will impose conditions, such as forcing the new company to supplying broadband and programming to all consumers at an equal price, with a special eye toward protecting rural subscribers.

Yet, two questions stand at the end of the day. First, will the conditions be such that the merged entity can accept them and still adequately (and profitably) run its business? And second, will the government be able to police each of the conditions implemented? Indeed, this dilemma alone points to the pure complexity of the entire matter.


If the merger goes through, get ready cable, get ready broadcasters, get ready everybody: There's a new heavyweight in town, and he knows how to fight! If it doesn't go through, EchoStar and DirecTV — perhaps a bit bloodied, but not bowed — will go back to fighting one another, as well as cable.

Ergen will know DirecTV much better (and be able to fight it and cable much more effectively), and he'll find new alliances and opportunities to keep growing and succeeding. For its part, DirecTV will know more about EchoStar — will be debt free and making cash — and will likely partner with or get sold to another big prizefighter, which will itself shake up the business forever. Either way, this fight is big, and the results will be staggering!