Satellite TV Deal Facing Challenges

Powerful members of Congress, business rivals, consumer advocates and even the investing public began to raise tough antitrust questions Monday about EchoStar Communications’ $25-billion deal to acquire Hughes Electronics and create a near-monopoly in satellite television services.

Washington regulators are likely to take a year to review the antitrust implications of the deal that could rewrite the rules of competition for pay-television services for the foreseeable future. Opponents are likely to use the lengthy review to agitate against it.

Members of Congress wondered whether the audacious merger plan announced late Sunday would leave rural subscribers stuck with no choices. Consumer advocates criticized the deal because it would reduce two large competitors into one. Would-be satellite competitors began fresh attacks in a long-standing bid to share satellite spectrum with EchoStar and Hughes’ DirecTV for new TV services.

Broadcasters came forward with demands that EchoStar be required in any deal to use satellite capacity freed up because of the merger to carry their local signals.

Cable operators were privately hoping for an arduous and distracting regulatory review that could give them the chance to trumpet new digital services--and regain market share lost to satellite rivals over the last several years.

And Officials at Rupert Murdoch’s News Corp., spurned in the drawn-out takeover battle for Hughes, continued working behind the scenes in Washington in an effort to shift sentiment against the merger.

In a stunning outcome to a yearlong takeover battle for the nation’s leading satellite television service, EchoStar beat out rival bidder News Corp. with an eleventh-hour bid that was accepted Sunday night by the board of General Motors, the controlling shareholder of Hughes Electronics.

The deal will make EchoStar the nation’s largest TV subscription service, with 16.7 million customers. Leading cable operator AT&T; serves 14 million subscribers.

The ensuing regulatory review by the Federal Communications Commission and Justice Department will be the biggest test yet of the Bush administration’s permissive stance toward deregulation.

Analysts say approval of the deal would incite further media consolidation, as cable competitors merged to take on a bigger EchoStar. The growing clout of distributors could shift the balance of power away from programmers such as ESPN and MTV, which have extracted steady price increases from cable and satellite distributors.

Some analysts predict EchoStar ultimately could become a target of a content provider such as News Corp., NBC or Viacom looking for distribution leverage.

While powerful interests were lining up against the deal, officials at both DirecTV and EchoStar were pitching it as a boon for the American consumer.

“By putting these companies together, we have a better chance of saving customers money and giving them better service,” said EchoStar chief Charles Ergen, who would run the combined company.

He claims that consumers would have more local channels on satellite as a result of the merger and even lower rates as about $56 billion in cost savings over several years from the combination are passed in part to customers. He said combining the nation’s two satellite providers is the answer the government has been looking for to stop rising cable rates.

Yet Wall Street investors seemed doubtful that the proposed merger would pass muster in Washington. GM and Hughes stock dropped because of the regulatory risks. Given the 20% premium EchoStar is offering Hughes shareholders, analysts had expected prices to rise.

EchoStar shares dropped $1.18 to close at $24.08 on Nasdaq. Hughes shares were down 99 cents to $14.36, and GM declined $2.64 to $42.76 on the New York Stock Exchange. The stocks of acquired companies typically rise after the announcement of a sale.

“On pure antitrust grounds, this deal would have little chance of getting approval, although the politics of the time means it has a 40% chance of passing,” said Blair Levin, an analyst at Legg Mason in Washington and chief of staff to former Federal Communications Commission Chairman Reed Hundt. “If Americans are paying $45 a month and their rates drop a buck or two a month, is that really a big deal? EchoStar’s logic could be used by cable to justify a single national cable provider to compete better in the residential phone market against the Bells.” And that is not likely.

The deal met with mixed reaction in Washington, where Capitol Hill lawmakers have waged a decade-long battle to bring more competition to the $41-billion-a-year cable television industry.

“The merger will produce a stronger multichannel video programming distributor that can compete more vigorously with cable companies,” Rep. Rick Boucher (D-Va.) said.

However, a number of lawmakers, including powerful Senate Committee Commerce Chairman Ernest Hollings (D-S.C.) said they were concerned that the deal would leave rural areas, which have little or no cable and over-the-air TV service, dependent on satellite for television programming. Hollings sent a letter to the FCC on Friday expressing his concerns.

Murdoch was using his significant pull with Republicans on the Hill last week to drum up opposition to the EchoStar transaction.

“Obviously News Corp. is well-connected politically, as we saw in some of the press reports last week,” said Ergen, who flew to Washington late Monday with DirecTV Chairman Eddy Hartenstein to sell the deal to regulators and lawmakers.

He said the company would be happy to sign a consent decree ensuring that the estimated 8 million homes that do not have access to cable get the lowest rate available.

“If approved, it would send a signal that it’s OK for satellite to have a monopoly but not for cable,” said Michael Goodman, a senior analyst at Yankee Group, a market research firm in Boston. “Company officials like to placate government officials by talking about the benefits to the consumer, but they are irrelevant in mergers, which are all about money and market position.”

Goodman also worries about consumer disruption as the companies combine their operations. “It could be good for consumers in the short term, because cable could more quickly roll out new services before EchoStar and DirecTV migrate to a single platform,” he said. Although Ergen said it will cost $2 billion and three or four years to swap out equipment, the companies said customers will incur none of the costs.

Yet retailers say customers already are questioning whether to buy a dish given the uncertainties, while cable operators gear up to exploit the opportunity.

“They will have significant regulatory, operational and technical challenges to deliver on this promise,” said Lynne Elander, a vice president at Cox Communications. “There’s an opportunity for us in the long period of customer confusion and disruption.”

However, some say federal endorsement of a deal is not out of the question.

“If the market is [defined by regulators as] satellite video services only, then this deal won’t get through,” said William J. Baer, a Washington antitrust lawyer who was the former director of the Federal Trade Commission’s bureau of competition. “If the market is more broadly defined to include other multichannel video services, then they have an argument to make.”

Another key factor in the deal may be a little-known but politically well-connected company called Northpoint Technology.

Northpoint, based in Washington, has been waging a four-year-long battle to win FCC endorsement of an unusual airwave-sharing arrangement with satellite TV operators. EchoStar and DirecTV have rebuffed the sharing arrangement, contending that it would cause signal interference.

But Northpoint said the merger of the remaining two video satellite operators makes its spectrum-sharing proposal even more compelling because it would allow the company to provide consumers in Los Angeles and other cities as many as 100 digital TV channels, including all of the region’s 23 local TV stations in competition to EchoStar and cable operators.

“This merger caps a long history of anti-competitive conduct by the satellite industry and demonstrates their failure to provide competitive choices for rural Americans,” Northpoint President Sophia Collier said. “Now more than ever, the marketplace needs the new nationwide price and service competition that our company can offer.”