Facing the regulators

With little opposition in sight, DBS merger could squeeze by

Last year, the Clinton administration quashed a $129 billion merger between the No. 2 and No. 3 long-distance phone companies, Worldcom and Sprint, even though they were taking on entrenched competitor AT&T. Last month, Bush antitrust regulators killed No. 3 rum distiller Diageo and Pernod's attempt to buy No. 2 Vivendi's Seagram even though combined production was less than No. 1 Bacardi's.

Those precedents don't seem to bode well for EchoStar Communications Chairman Charlie Ergen, since his proposed $30 billion deal to buy DBS rival DirecTV would reduce consumers' pay-TV choice from three distributors in most markets to just two: DBS and cable.

But Ergen has a key element in his favor: No big crowd is lining up against the deal.

The most obvious protesters—cable operators that compete against Ergen—seem to be sitting this out. Operators will enjoy watching its biggest rivals tying themselves up in knots for months trying to get approval.

AOL Time Warner's Gerald Levin said at a breakfast meeting that "I don't believe there are antitrust concerns. Charlie Ergen is an entrepreneur and should have his day in the sun."

And consumer advocates are thanking their lucky stars they aren't facing the tag team of News Corp.'s Rupert Murdoch and Liberty Media's John Malone.

House Energy and Commerce Committee Chairman Billy Tauzin (R-La.) last week said he would back the merger as long as EchoStar would agree to national pricing terms guaranteeing rural subscribers fair prices.

Add to that regulators' years-long effort to check the power of cable operators, and their annoyance over constant price increases.

There are plenty of skeptics, though. Soon after the merger was announced, analysts began rating its chances: "This has a one-in-three chance," said Scott Cleland, CEO of the Precursor Group, an independent research company in Washington. "It can get done; it's just not likely to get done."

Ergen's challenge in Washington is two-fold. First, he must convince antitrust authorities and the FCC that the market includes both satellite and cable and he's merely merging the No. 3 and No. 6 players. "If the market is satellite-only," he says, "then even I wouldn't approve this deal."

Convincing the authorities shouldn't be too hard. "I would be very surprised if the authorities didn't decide that the market was the entire multichannel market," says Phil Verveer, partner at the Washington law firm of Willkie, Farr and Gallagher. "Antitrust authorities have come to that conclusion in the past, and the FCC uses that definition."

Second, and much more important, Ergen must prove that consumers would get better prices and services if the two DBS companies were allowed to become one.

His best chance at accomplishing that is to prove that the merger will produce efficiencies that would be otherwise impossible. Because satellite TV relies on spectrum, he rightfully can argue that he can better serve the public by operating one nationwide satellite service against cable operators. A merged EchoStar-DirecTV has to carry each local TV station only once, as opposed to taking up satellite space on both systems. That would open room for EchoStar to carry more local TV stations and serve more markets.

"Aggregating the spectrum means EchoStar ought to be able to bring local-into-local service into smaller markets, and it ought to be able to carry smaller channels, about which we care," said Andrew Schwartzman, president of non-profit law firm Media Access Project. "That would improve the distribution of broadcast services into the rural communities."

Right now, EchoStar and DirecTV offer local TV stations in about 40 markets. Most markets are duplicative, so the two services are using valuable spectrum to carry the same local TV signals.

"At a minimum, government regulators should condition this deal on a guarantee that this additional satellite channel capacity be devoted to the carriage of the signals of all local television stations," said NAB President Eddie Fritts last week. Broadcasters did not say that they would support the deal if their condition was granted, but they also do not oppose it.

Ergen appears willing to accept any number of conditions. Asked about critics' skepticism of the approval, he said, "Are these the same guys who gave us a one-in-100 shot to get a satellite up and launch it on a Chinese rocket? Are these the same guys who gave us a one-in-10 shot of doing this deal? I'm very excited that our odds are improving."