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EchoStar's chances: slimmer

With the way things are going, deal-watchers will be shocked if EchoStar Communications Corp.'s proposed $26 billion merger with Hughes Electronics, and its DirecTV subsidiary, is approved by regulators.

Evidence that the deal faces an increasingly tough time comes from several sectors, including the FCC and Wall Street. The big question, though, is what the Department of Justice thinks about the merger. But that question is expected to remain unanswered until September at the earliest.

Antitrust lawyers have been adamant that, on its face, the merger violates basic antitrust guidelines. It's a simple argument: The merger reduces consumer choice in some markets from two multichannel television providers to only one.

"I think all the political noise has a marginal effect, but I think it has more influence over the FCC than [over] the DoJ," says Blair Levin, former chief of staff for former FCC Chairman Reed Hundt and now an analyst for investment firm Legg Mason. "I think, in this particular case, DoJ is going to do a very traditional antitrust analysis and come to the conclusion that this merger violates traditional antitrust guidelines."

Adds a satellite-industry attorney: "This is not about politics, it is really about antitrust law. The key is the way the Department of Justice views the antitrust issues."

While DoJ works at its legal analysis, the FCC must decide whether the merger is in the public interest. EchoStar may have a hard time convincing the FCC of that, since the commission has expressed exasperation with EchoStar because of the satellite-TV company's perceived repeated bad behavior.

In a recent FCC decision footnote, the commission cites several instances when EchoStar was fined for "rule violations and admonished for its 'disingenuous' behavior and lack of candor."

"The body language alone shows that the FCC does not like that merger," says Scott Cleland, CEO of The Precursor Group, an independent research firm in Washington. "They've delayed review of it twice. There's nothing subtle about the signals the FCC is sending EchoStar."

Says Yankee Group media analyst Aditya Kishore, "The sense that we've been getting from regulators is that they are not particularly impressed by EchoStar's arguments."

Those arguments are that the deal will allow a merged EchoStar and DirecTV to carry local TV signals in all 210 U.S. markets, provide high-speed Internet access to the entire country and offer equal pricing to consumers in all markets. But the FCC has to believe EchoStar's promises in order to agree to them, and that might be an issue if the commission thinks the company has credibility problems.

"One has to ask whether these promises are believed," says the satellite-industry attorney. "When you have the FCC issuing decisions basically saying that these people lack candor, it suggests they have a believability problem at the commission."

In response, some say EchoStar is making some broad gestures to convince regulators that the merger is necessary. They suggest the company has gone so far as to back away from its broadband investments—writing off 60% of its $100 million investment in Gilat Satellite Networks' Starband venture and writing off completely its $50 million investment in WildBlue Communications—in order to prove that, without the merger, nationwide broadband will not occur.

EchoStar says the reason for getting out of those businesses was simpler than that, arguing neither deal was economically sustainable.

And EchoStar Chairman Charlie Ergen downplays the whole thing: "Everybody you read talking in the papers is being paid. By the NAB, by the NRTC, by Fox or by us. Wait to see what the people making the decisions say."

There are plenty who say Ergen will do what he must to get his way. "Everything Charlie is doing right now is strategically designed to increase his chances of getting the merger approved," says Susan Irwin, president of Irwin Communications Inc., a Washington-based consulting/research firm.

Irwin is among a minority who think the merger "still has a 50-50 chance of going through," even counting its strongest advocate, Ergen. "If this is not a good deal for consumers, then [regulators] should not allow this merger," Ergen said last week to a group of Washington attorneys. "But I am convinced it is, because I talk to my customers every day and I know the economics of putting the two companies together will allow us to have lower prices and more services than we otherwise would."

Still, Ergen knows he has a lot of convincing to do. So, in the past two weeks, he and other EchoStar execs have begun pitching the notion that the DBS market will soon have many competitors, contrary to the understanding of most who follow the industry.

"It's what we've said all along. New entrants will come into this marketplace," Ergen said. "New technologies will evolve. The Internet will compete with us eventually. Fiber-to-the home will compete with us, and cable operators. If you don't keep moving in telecom today, you just end up being a carcass on the information superhighway. I don't want to go down and see Bernie in Mississippi and go hunting together," Ergen said, referring to ousted MCI Worldcom CEO Bernie Ebbers.

Ergen named several recent arrivals. SES Americom, an American subsidiary of Luxembourg-based SES Global, announced in late April it wants to offer a wholesale DBS service at 105.5 degrees. Ergen said he's concerned about interference but "we're happy to see competition."

He also mentioned possible competition from Northpoint Technology, whose license application the FCC approved two weeks ago; Pegasus, which has licenses to fly satellites in the Ka-band that could compete with traditional DBS; Digital Broadband Applications Corp., a U.S.-based company that wants to use Canadian orbital slots and satellites to offer DBS services; and cable operator Cablevision, which possesses a license to use a DBS orbital slot at 61.5 degrees.

"As the merger proceeds and people realize it will happen, there are many opportunities for people to get in there and compete with us as long as they are willing to do two things: risk their capital and get off their tails," Ergen said. "But I believe the merger will be approved without those entrants."

But antitrust experts think it will be years before new competition enters the DBS market, and potential competition is usually not enough to persuade Justice to approve deals that eliminate real competition.

"This is sort of simple antitrust analysis," says FCC Chairman Michael Powell, commenting on whether Northpoint Technology will provide competition to DBS providers. "Are they in the market? Are they really a disciplining component? I suspect that the merger is too far ahead of it as a service for competitive analysis."

Even if the merger is not approved, it shouldn't really matter to Ergen.

Says Levin, "Charlie has done a brilliant job of positioning his company to benefit regardless of whether the merger is approved or not."