Rural Weakness?

Depending on who's doing the talking, the proposed merger between EchoStar Communications Corp. and DirecTV Inc. parent Hughes Electronics Corp. would either bring a bounty of video and broadband services to rural Americans — or drive up prices for a defenseless group of consumers at risk of losing any choice among multichannel video providers.

EchoStar chairman Charlie Ergen — who's been the strongest cheerleader for the deal's benefits to rural consumers — told Dish Network customers last Monday during an on-air "Charlie Chat" that more direct-broadcast satellite viewers would gain access to local broadcast channels in the event of a merger. The joint company would likely deliver local channels in 100 markets, including at least one city in each of the 50 states, he said.

Eliminating programming duplication among Dish and DirecTV could free up satellite bandwidth for the delivery of more national programming, including additional high-definition television channels, Ergen has argued.

In the past, Ergen has used his monthly "Charlie Chat" to encourage loyal subscribers to support his various battles in Washington. He also has a 20-year history with rural satellite-television dealers that dates back to his days as a distributor of big-dish C-band satellite systems in the early 1980s.

Asked if EchoStar would encourage its rural customers or retailers to pitch their elected officials on the merger, company spokeswoman Judianne Atencio would not comment.

But EchoStar could use the support, in light of recent reports indicating that members of Congress and rural-state attorneys general will come out en masse to oppose the merger.

Scott Holste, a spokesman for Missouri attorney general Jay Nixon, last week confirmed reports that Nixon's office is at the forefront of a group of as many as 30 states' attorneys general who are examining whether to file suit against the deal. Different states within that group have expressed varying levels of concern, he added. States with heavier concentrations of rural constituents, such as Iowa and Connecticut, tend to be more concerned.

A November letter from Nixon asked U.S. attorney general John Ashcroft to intervene to protect consumers from the monopoly a DBS merger would impose in rural areas unserved by cable.

"If this merger is allowed to go through, we will almost certainly create an environment where prices will rise, services will fall and innovation will stagnate, particularly in our rural areas," Nixon wrote in the letter.

As a merger condition, Ergen has offered to guarantee universal national pricing. But some critics remain skeptical.

Even if the government were willing and able to oversee a national pricing policy for monthly programming, it would be harder to monitor charges for hardware, installation and service, as well as other costs.

In 1994 — when DirecTV had the DBS market to itself — a new hardware system cost more than $700, plus an additional $200 for installation. With today's head-to-head competition between DirecTV and EchoStar, it's not uncommon for a new DBS subscriber to get both hardware and installation for next to nothing.

Following a merger, competition between national retailers such as Best Buy Inc. and Circuit City Stores Inc. might continue to drive down the retail price of a new DBS system in some larger markets. But in rural America, things could play out differently.

"In a lot of places where my customers live, there are no Circuit Citys," National Rural Telecommunications Cooperative vice president of external affairs Adam Schwartz said.

Perhaps more to the point, there's also no large MSO to offer a bounty for DBS customers who sign up for digital cable.

Only a single-digit percentage of U.S. homes lie in rural areas that aren't served by cable. But some see that figure as likely to rise if EchoStar is left as the sole DBS provider, and steps up efforts to drive small cable operators out of business.

Industry sources have confirmed published reports that EchoStar had pitched customers of Classic Communications, which had filed for Chapter 11 bankruptcy protection last fall. It warned Classic subscribers that the MSO was about to go out of business, and told them they'd lose their video programming unless they signed with EchoStar's Dish Network.

EchoStar declined to comment on reports of a possible lawsuit to enjoin EchoStar from targeting Classic customers. Executives with the MSO did not return phone calls last week.

Pricing is not the only concern raised in the case of a monopoly provider. Without competition, rural consumers would have nowhere to turn in the event EchoStar dropped a channel during a contract dispute, and Ergen hasn't been reluctant to make such moves.

Pegasus Communications Corp. CEO Mark Pagon said the merger may actually benefit rural consumers, but only if EchoStar commits to providing broadcast channels from all local markets and delivering broadband services at an affordable price. Without those concessions, however, rural consumers would be making a sacrifice and getting nothing in return.

"Competition has been very good at providing affordable video," Pagon said.

Pegasus has publicly raised concerns about how the merger could hurt rural competition.

"The irony of all this is we're better off [as a company] if the merger goes through," Pagon said. With new contracts following the merger, Pegasus would no longer have to compete with EchoStar in certain NRTC territories, as it does now.

In lobbying for the merger, Ergen has argued that better economies of scale would allow the combined company to offer broadband services in rural areas. Without the merger, he has claimed, broadband-over-satellite service would not be viable.

But Elizabethtown, Ky., satellite retailer Rik Hawkins doesn't agree that a merger between the two DBS giants is the only way to deliver broadband to rural America. Other companies may have the opportunity to deliver broadband using terrestrial wireless or Ka-band satellite technologies, he said.

Advances in compression technologies and spot-beam satellites should allow DirecTV and EchoStar to add many more local broadcast channels even if the companies do not merge, Hawkins added.

American Cable Association president Matt Polka is skeptical about Ergen's claim that EchoStar could not continue to offer broadband services without a merger.

"I don't buy it," Polka said. "He's using it as a scare tactic to get people to approve the merger."

Polka is also concerned that EchoStar would engage in predatory pricing to eliminate competition, especially among small cable operators.

"Charlie [Ergen] doesn't intend to be just another provider, but a dominant, sole provider," Polka said.

The benefit of keeping small cable operators in business is they're able to deliver local programming, even in markets where DBS can't or won't.


WSNet Inc. has been test-marketing a digital satellite service that allows small cable operators to sell a hybrid package of digital cable and local analog programming to rural customers. WSNet will also offer a direct-to-home satellite option that operators can sell in areas that haven't been wired for cable.

"We truly believe we're going to help save the rural operator," WSNet chief operating officer Stuart Lefkowitz said. With respect to the EchoStar-DirecTV merger, the company is "neutral," Lefkowitz added.

EchoStar does have some friends in the rural community. On Dec. 27, American Farm Bureau Federation president Bob Stallman endorsed the merger in a letter to Congress, citing the benefits of bringing broadband services and local broadcast channels to rural America.

The specter of a rural monopoly raises real concerns, noted Alpert & Associates president Mickey Alpert, but not enough to stop the deal. There's a 65 percent chance the merger will be approved, he said, but only if Ergen agrees to conditions negotiated with the Department of Justice.

There are certain conditions Ergen would never agree to, Alpert insisted, such as giving up satellite spectrum within any of the three full continental U.S. (CONUS) slots. He may, however, be persuaded to give up capacity at 61.5 degrees or 148 degrees. A new entrant could then use that spectrum to provide DBS competition.

For his part, Tellus Venture Associates president Steve Blum doesn't think the government should get involved in determining multichannel competition in rural America.

"It's not incumbent upon the U.S. to provide lifestyle subsidies to people," he said.

But Blum thinks it's "inevitable" that at least some states' attorneys general will file suit against the merger.

"Attorneys general have learned they can generate a tremendous amount of publicity by making villains out of people," Blum said.