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Pay-TV faces diminishing returns
A golden age of consumer choice in pay-television service, promised when Congress deregulated the telecommunications industry in 1996, is poised to become an even more distant dream after the announcement that the nation's two dominant satellite TV operations plan to merge.
EchoStar Communications Corp.'s offer of about $24 billion in cash and stock to buy General Motors Corp.'s Hughes Electronics division, which includes DirecTV, would leave most Americans with only one choice for satellite TV service, rather than two.
Although experts have said the deal will face tough regulatory scrutiny, the companies are preparing an offensive to get it cleared, stressing that, combined, they serve less than 20 percent of the nation's households, roughly equivalent to the biggest cable providers.
But a fragmented market nationally doesn't necessarily translate into plenty of choices locally.
By and large, the only other option for multichannel pay-television is cable, and most Americans only have one choice. In the Chicago area, competition is only token, with AT&T Corp. serving the vast majority of households. In rural America, millions of households have no access to cable service.
And, even though some companies have tried, a viable third alternative would be a couple of years away, at best.
"What's been happening is pretty much opposite to what Congress told the American people" in 1996, said Gene Kimmelman, co-director of Consumers Union, a Washington, D.C.-based non-profit organization. "We were told it would bring the entry of the telephone companies into the cable business, and vice versa, but instead we've had enormous consolidation within each sector.
"And here is the ultimate consolidation, with the last two satellite companies."
Indeed, "it is difficult to imagine regulators will allow this to go through," said Robert Rosenberg, president of Insight Research Corp., a telecommunications market research firm in Parsippany, N.J.
The deal faces huge hurdles to gain regulatory approval, a process that could take as long as a year.
"The deal will bear a heavy burden of proof because it significantly reduces competition in an already concentrated market," Blair Levin, an analyst with Legg Mason, wrote in a report this week. "And there are clear precedents suggesting the transaction will not meet that burden."
Still, the companies will ask regulators to look at their request in a different way: Don't view it as reduced competition in satellite broadcasting, but rather as creating a more robust competitor in the pay-television universe, including cable.
And consumers will benefit, they say.
"The new company would have enhanced scale to compete more effectively against the dominant U.S. cable and broadband providers," said Charles Ergen, chairman and chief executive officer of EchoStar, which owns the Dish Network. The combined company would have 16.7 million customers, roughly equal to AT&T, the nation's biggest cable provider.
After eliminating duplication in spectrum use and infrastructure, Ergen said, the company could offer more channels, including local channels. Many satellite customers in midsize and smaller markets cannot get local channels now.
As well, the combined company could have more high-definition TV offerings and could accelerate introduction of high-speed Internet services, he said. Cable has the edge in providing Internet service now.
The combined firm also could trim its costs for programming, and pass those savings on to consumers in the form of better pricing, said Sean Badding, a senior analyst with The Carmel Group, in Carmel, Calif.
But not everyone is buying those lines of thinking.
"Do consumers really want to have one orbiting gatekeeper who can decide what channels they should receive and how much they should pay?" said Jeff Chester, executive director of the Center for Digital Democracy, a Washington-based advocacy group.
Others aren't crazy about the idea either, but say it can be made palatable if the companies agree to concessions to gain regulatory approval.
The Consumers Union would like to see two conditions met.
First, customers in rural areas unserved by cable should be able to pay the same rates as customers in markets where there is cable competition, Kimmelman said.
And second, the satellite companies should drop their opposition to a new type of pay-television competitor, he said.
The companies have opposed efforts by Northpoint Technology Ltd., a company based in Austin, Texas, to launch a ground-based pay-TV system that would use part of the satellite spectrum.
"They've had a cozy duopoly and now it would be a monopoly, and they don't want anyone else to be part of it," said Sophia Collier, president of Northpoint, noting her firm's application has languished at the Federal Communications Commission for years.
FCC Chairman Michael Powell has said the agency will act on the application by year-end.
If it is approved, Northpoint's service could start in 30 markets within six months, Collier said, and could be nationwide within two years.
But some observers are skeptical about the chances for new entrants, especially given the tough economic climate. Even in the boom times of the late `90s, start-ups and other would-be cable companies, including Baby Bells, found it economically or technically infeasible to compete with established monopolies.
"It's more or less a license to lose money," said Michael Goodman, senior analyst with the Yankee Group, a research and consulting firm in Boston.
"You've got two very well-established entrants--cable and direct-broadcast satellite," he said. "It's good being No. 1, it's not bad being No. 2, but it really stinks being No. 3."
If anything, the proposed merger of EchoStar and Hughes will give cable a chance to get stronger, he said.
Assuming it will take one year for regulatory approval and two more to integrate their operations, cable will have three years to spruce itself up, he said.
Cable companies can use the time to roll out video on demand, to increase local content and to move toward greater use of TV portals that allow interactivity, he said.
"Those are areas where satellite doesn't do well," he said.