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What If EchoStar Bought DirecTV?

Although it appears less likely as the industry travels toward its 26th (and 4th annual) trade show at Nashville, Tenn.'s, Opryland Hotel, numerous General Motors shareholders and others interested in the long-term good health of the U.S. telecommunications industries will likely ask: "What would have been the result if Charlie Ergen had been permitted (by GM management, shareholders and the government) to buy and run DirecTV?"

To start with, there would be lots to say on both sides of the issue. In fact, I'd venture to suggest that there would be more to say about an EchoStar purchase than if — as will likely be the case — Rupert Murdoch and his News Corp. buy the direct-to-home unit of GM Hughes Electronics. Nonetheless, there is plenty in the following that applies equally to a Murdoch purchase of DirecTV as we move through the final stages of the News Corp.-DirecTV marriage proposal.

Key to the assumptions below is the definition of the players and the market. For that, the question becomes how to best serve the U.S. consumer. Should numerous domestic direct-broadcast satellite companies compete amongst themselves and
against cable? Or should DBS, as an industry and a technology — competing alone in the form of perhaps just one company — compete only
against the industry and technology known as cable? Defining these answers is the antitrust question, which, in turn, does much to answer the underlying question: "Can
EchoStar Buy DirecTV?"

THE PROS

Listed below are 13 points highlighting key issues favoring single ownership of the U.S. DBS space by an entrepreneur such as EchoStar's CEO, Ergen.

  • Efficiency of operations is probably the best argument for a unified U.S. DBS spectrum. Presently, EchoStar and DirecTV send a majority of their programming signals in duplicate. Yet each time, they are sent via separate servers and transmitters to set-top boxes in millions of homes where, if one receives DirecTV, one cannot also receive EchoStar via the same system. It could be argued that, under the present structure, only half of each system gets adequately used.
  • With the sharing of a single domestic DBS spectrum, the efficiencies could lead to a better platform to combat cable. Of today's three prime, or "full-CONUS" DBS orbital slots—with a full view of the entire continental U.S.—a single-system DBS subscriber could look at all the channels from all three locations concurrently. This would greatly enhance the total content received. For local-into-local, the increased bandwidth means access to many more cities, even assuming court affirmation of a full "must-carry" law. The same could be said for all the forthcoming interactive services.
  • Improved efficiencies in uplink and subscriber management centers, at distribution points and with local-into-local signal transmissions (known as "backhauls"), as well as lower costs for management, advertising and elsewhere, could lead quickly to savings passed to the consumer in billions of dollars.
  • The cost of bringing new customers to the industry could be greatly reduced. For example, if the new DirecTV-EchoStar entity was no longer required to pay "exclusivity" fees to keep rival products out of many of the nation's consumer electronics dealerships, the savings for all would be significant.
  • Presently, DBS pays anywhere between 5 percent to 15 percent more for programming purchases than do the large cable operators. A combined DirecTV-EchoStar would—assuming government-imposed programming access provisions remain in place—negotiate more evenly with cable. These savings, too, could be conveyed to consumers in the form of better content at lower prices, which could alleviate yearly cable and DBS rate increases. It's interesting to note that, during the past seven years, with two to five DBS companies to chose from, cable rates nationwide have continued to rise.
  • A universal set-top box and other hardware would reduce churn and help to increase content availability and the deployment rate. A single-system box would standardize digital compression, as well as the carriage of high-definition television and encryption services, to name a few.
  • Eventually, EchoStar could assume the lead in combating piracy. Thus far, with its Switzerland-based Nagra system, EchoStar has apparently had greater success controlling the content thieves than DirecTV, with its News Corp. NDS product.
  • A merger would eliminate some nasty lawsuits. For example, DirecTV and EchoStar are suing each other over an antitrust issue, this one in the form of DirecTV's rights to maintain product exclusivity in almost 30,000 consumer electronics outlets nationwide.
  • A single system would simplify the consumer's DBS purchase, both on the software and hardware sides. Fewer choices among set-top boxes and programming packages, would make it easier to shop for, and select, any given offering. This would make it easier for consumers to get into DBS. The complexity of switching to DBS from cable is often cited by consumers as negative in the selection process.
  • The combined DBS company could drive advertising and interactive revenue. This could help reduce DBS's present need for programming revenue, which could also reduce consumer rates. Data suggests that today's cable companies get over $40 per subscriber per year from ad revenues, which is not yet the case for DBS, where the annual per subscriber dollar figure is in the lower single-digits.
  • Especially for rural America, one single system would enhance the economic viability of broadband via two-way satellites, and help create the critical mass necessary to make two-way satellite investments.
  • DirecTV would be released from the stranglehold that GM has held over it during the past 10 years, giving EchoStar an opportunity to unleash DirecTV's full potential.

THE CONS

  • Foremost among the critiques is the antitrust implication. Many industry pundits see the elimination of choice for DBS consumers as the crux of their concerns. Most believe that the DBS's lifeblood is its choices—be they programming, hardware, or customer service.
  • A merger would take out some of the best people in the business—i.e., DirecTV management.
  • Instead of lowering prices, the combination could cause prices to rise. As competition dwindles, there would be less to keep errant competitors in check.
  • DBS would become a weaker competitor, instead of a stronger one, as noted above. The loss of competition within the industry would have a ripple effect, as the new DirecTV-EchoStar battles the cable industry with its 65 million paying subscribers.
  • The consumer would have fewer choices available when buying satellite equipment, and programming packages would be limited, as well.
  • Consumer electronics dealers would not make as much money. Many would suffer dearly, especially if they are smaller and focused on satellite. Most would be unable to manage cost increases without playing one DBS provider against the other. Other vendors in the industry—who rely on the personnel from both companies to place orders and drive business—would be hurt, as well. Programmers, for example, would see reduced bargaining power from a combination.
  • Making the EchoStar and DirecTV conditional access and transmission systems compatible would take years and perhaps billions of dollars. Twenty years later, it would be good to have a universal DBS standard, but getting there and paying for it now, could harm the industry and the consumer.
  • The new entity would be shackled with tremendous financial burdens, which even a Carl Vogel (the former EchoStar president and financial wizard) could not easily unravel.

IN SUMMARY

In the end, the above definition of the players and the market is pivotal to any antitrust analysis. If regulators and courts define the pool as not including other DBS operators, it would be simple to make it a "cable versus DBS" game, and allow the completion of the DirecTV-EchoStar merger. In this game, DBS — even if it's one company — can present strong competition to thousands of today's cable operators. Conversely, if regulators decide that DBS operators should compete amongst themselves in order to best serve the public interest, then taking away one of two competitors means the industry is automatically transformed from a duopoly to a monopoly. In that scenario, DBS has the danger of becoming an "entrenched monopoly," something it has decried for years in cable.

Ultimately, if GM Hughes Electronics turns down an EchoStar bid, or regulators fail to answer the antitrust question, we'll never know the answer to this question, "What If EchoStar Bought DirecTV?" Instead, we play the odds, and make our decisions accordingly, which is what the GM Hughes Electronics board appears to have done.