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on EchoStar merger
Analysts: Chance of feds approving deal is slim
By Kevin Downey
The $26 billion merger agreement between EchoStar and General Motors' DirecTV, announced yesterday, will go down as one of the biggest media deals in history.
It also stands a good chance of going down as the largest media deal in history to get shot down by federal regulators, say analysts who follow the satellite industry, which the two companies dominate with more than 90 percent of America's satellite-equipped homes.
The thinking: Federal Communications Commission chairman Michael Powell may be a fan of deregulation, as is the Bush White House, but even they will balk at supporting a merger that would virtually end competition in the satellite industry.
"You’re eliminating the only other direct-broadcast satellite competition," says one media analyst who asked to go unnamed.
"You’re instantly creating a monster company with a huge amount of bandwidth, which has all kinds of implications for competing with other multichannel providers. You suddenly have a company with a tremendous amount of leverage over equipment suppliers and programmers."
What seems to be a mystery is how the deal ever got to the table for signing, with both parties presumably aware of the opposition such a merger stood to rouse, even among conservatives, as indeed it has done in the days since the merger was announced.
Analysts suggest the merger would never have gotten this far during the Clinton administration.
Indeed, their doubts over approval may be one explanation for the abrupt withdrawal from the bidding on Saturday by Rupert Murdoch's News Corp., after 18 months of talks.
The thinking: Murdoch is convinced that the feds will scotch the deal, which would force GM to reopen talks with News Corp., with News Corp. now the only contender and thereby in a position to offer far less than when the bidding was competitive.
The newly formed company, to be called EchoStar, would account for 90 percent of the satellite TV market, with nearly 17 million subscribers. EchoStar has about 6.4 million subscribers and DirecTV, which is owned by GM’s Hughes Electronics subsidiary, has over 10 million.
Defending the deal, EchoStar is countering that the new company would actually only account for 17 percent of the pay television market, when cable providers are factored in.
Competition within the satellite industry is an especially sensitive issue, and the federal government and regulators have gone out of their way to nurture it.
When satellite TV emerged in the mid-1990s, it was widely seen as an antidote to the monopolies that had arisen in the cable industry, which was by then under increasing attack not only for raising prices to consumers but for putting off investment in system improvements.
In most markets, satellite is the only alternative to a single cable provider, and Washington policy folks believed satellite was the one force that could force the cable industry to improve service.
But you needed two satellite providers, not just one, for that to work.
"If you have two competitors instead of three competitors, it’s easier to raise prices," says John Mansell, an analyst at Paul Kagan Associates.
"If one goes up, the second one may have more of a tendency to increase rates a little bit. With three companies, that’s more difficult."
In EchoStar and DirecTV, Washington found the ideal pair, two aggressive competitors who fought in the marketplace and pretty much wherever they ran into each other, their CEOs often trading vicious barbs.
The potential end of this rivalry is generating protest from a wide range of interest groups, such as the National Consumers League, which is asking the Federal Trade Commission and the assistant attorney general for antitrust affairs to act to block the deal.
And even it if does pass muster on antitrust grounds, some analysts speculate that Congress may act to block the merger.
"It’s not just that they would have 90 percent of the satellite market, it’s that this is the one way that competition can viably enter the multichannel provider market," says one.
"You’re not going to get competition in through cable; the economics are too complicated. Where you are going to get competition is through satellite, and right now there are only two players."
Just why Murdoch pulled out of talks with GM is unclear.
Officially, the company blamed inaction on the part of General Motors, suggesting that it favored the deal with EchoStar after giving that company several extensions to get financing.
But analysts say that was just a cover story.
"I honestly believe that News Corp. may have decided to sit back, watch this thing run into antitrust trouble, and then possibly pick it up for a better price when GM’s only got one buyer out there," says an analyst.
The next steps in the merger between EchoStar and DirecTV will serve as something of a test case for the FCC's Powell and the Bush Administration.
Powell, whose background is in antitrust issues as a former Justice Department lawyer in the Clinton Administration, is considered to be lenient when it comes to media mergers.
He argues that the antitrust issues that have taken up so much of the FCC's attention in recent years are really issues for the Justice Department.
He’s been critical, for example, of the rule preventing companies from owning a newspaper and a TV station in a single market, as well as one that prevents broadcast networks from owning TV stations that together reach more than 35 percent of households.
As analysts see this merger playing out, the FCC will approve the merger but then pass it on to the FTC or, more likely, the Justice Department.
The Justice Department would be empowered to approve the merger, approve it with conditions, ask both companies to abandon the deal, or go to court to block the deal.
Analysts contacted by Media Life speculate that the Justice Department will ultimately ask the companies to drop the proposed merger, as they did with Worldcom’s bid for Sprint last year.
At that point, it is believed that EchoStar would drop the merger entirely, opening the way for Murdoch.
The regulatory process is expected to last until the latter half of 2002.
Whatever happens, though, GM has little to lose in the deal.
The value of DirecTV is expected to hold or rise because it’s the dominant player in a growing industry. And, as part of the agreement reached over the weekend, EchoStar will pay GM $500 million if the deal is blocked.
October 30, 2001 © 2001 Media Life
-Kevin Downey is a staff writer for Media Life.
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