Daily Breeze

October 11, 2002

DirecTV merger blocked by FCC 
EL SEGUNDO: Panel says deal between EchoStar and Hughes Electronics is not in “the public interest.” 

By TOBY ECKERT and Muhammed El-Hasan
Copley News Service

WASHINGTON — The Federal Communications Commission rejected a proposed merger Thursday of El Segundo-based Hughes Electronics Corp. and EchoStar Communications, dealing a potential deathblow to the companies’ plans to create the nation’s largest pay television service.

FCC Chairman Michael K. Powell said the commission “cannot find the merger is in the public interest.” It voted 4-0 against allowing the consolidation of Hughes’ DirecTV and EchoStar’s Dish Network, which together have 18 million satellite TV subscribers.

The commission echoed concerns voiced by outside critics of the deal who said it would create a satellite or pay-TV monopoly in many areas. Some rural areas, where consumers have no other choice but satellite television, would be particularly affected, leaving them with just one provider, opponents of the deal argued.

“At best, this merger would create a duopoly in areas served by cable; at worst it would create a merger to monopoly in unserved areas. Either result would decrease incentives to reduce prices, increase the risk of collusion, and inevitably result in less innovation and fewer benefits to consumers. That is the antithesis of what the public interest demands,” Powell said.

“The proposed merger would eliminate an existing, viable competitor in every market in the country,” he added.

The companies indicated they would continue pursuing the deal. The FCC gave them 30 days to file an amended application that addresses the concerns raised about competition.

Rep. Jane Harman, D-Redondo Beach, welcomed the FCC decision. Harman is worried that a merger of DirecTV and EchoStar would lead to job losses in her South Bay district.

“I thought it was an anti-competitive idea and an anti-El Segundo idea. I think there are better alternatives,” she said.

One of those would involve NewsCorp. re-entering the picture as a
possible suitor for DirecTV, Harman said. NewsCorp. has pledged to keep DirecTV jobs in El Segundo, she said.

Tod Sword, business assistance manager at the South Bay Economic
Development Corp., said he feared the loss of South Bay jobs if Hughes were sold.

“I’m not saying it’s good or bad,” Sword said of a potential sale. “My concern is there may a loss of jobs, that once again a major company’s decision-making base will leave the region. If they go away, how many companies that provide things to them — any company that’s a subcontractor to them — could go away too?”

DirecTV employs 1,141 workers in El Segundo. It also has 149 workers at its broadcast center in Marina del Rey, and 101 employees at a Latin American broadcast center in Long Beach. Hughes’ corporate office in El Segundo has about 200 employees.

The FCC decision came just three days after Hughes and EchoStar asked the commission to delay ruling on the case until they addressed concerns raised by Justice Department anti-trust officials. The department is conducting its own review of the proposed merger.

Echostar and DirecTV argue that a merger would create an entity better able to compete with cable television, offering consumers more choices and lower prices. They also proposed a uniform national pricing plan to address concerns about reduced competition in certain areas.

In a letter to Powell, the companies said they were discussing possible “major revisions” to the deal and “structural remedy proposals.” While executives did not elaborate, the companies reportedly were hoping to sell some transmission capacity in a bid to create more competition.

Sean Badding, senior analyst at The Carmel Group, said he expects Hughes and EchoStar to continue pursuing the merger.

“I’m sure there’s going to be an appeal . . . showing that this deal
actually does make sense as they’ve been trying to argue from day one,” said Badding from Carmel. “They’re really going to be scurrying.”

If the merger ultimately fails, Badding said General Motors still would want to find a buyer for Hughes. 

Badding said John Malone, chairman of Englewood, Colo.-based Liberty Media Group, would be a likely suitor for Hughes.

“You might even see (News Corp. Chairman) Rupert Murdoch coming back in a secondary role, possibly supporting Malone’s bid,” Badding said. 

News Corp. lost its initial bid for Hughes when EchoStar made a better offer.

“Being burned once is one thing. But being burned twice makes him a little sensitive about leading the charge here,” Badding said of

After a failed merger, Malone might have more leverage in bidding for Hughes than EchoStar did since there would be fewer possible suitors, Badding said.

Cable companies would benefit from a failed Hughes-EchoStar merger because both companies expended a great deal of time and resources in the attempt, Badding said.

“Cable operators will really have a chance to bring a stronger focus on (adding) subscribers or even adding new services such as high-end set-top boxes,” Badding said. 

Steven Artuso, an analyst with Pittsburg Research in New York, agreed that Hughes and EchoStar probably will fight to the end to push the merger through. But Artuso said the attempt is unlikely to succeed because it would reduce competition.

Cablevision Systems Corp. of Bethpage, N.Y., has expressed interest in purchasing channels from a merged Hughes-EchoStar. That would allow Cablevision to compete with the combined company, possibly mitigating anti-trust concerns.

Artuso doubted that would happen. “I don’t know how Cablevision, with all its cash flow problems, can find the funding to launch a new
venture,” Artuso said. “There’s a lot of questions here, and it’s very
likely that even if they revise (the merger petition), unless something major happens from here to Jan. 21, it’s not likely that it’s going to happen.”

The FCC will submit its findings to an administrative law judge. The
companies can then present their case to the judge, whose ruling would be forwarded to the FCC for a final vote.