DBS Merger Touts Sky-High Services

The proposed merger of the two leading U.S. satellite TV providers could bring a new wave of services for consumers: inexpensive high-speed Internet, more local-into-local offerings, more HDTV - all with nationwide price caps to ensure the new mega-DBS company doesn’t gouge cable-free rural America.

The proposed merger of the two leading U.S. satellite TV providers could bring a new wave of services for consumers: inexpensive high-speed Internet, more local-into-local offerings, more HDTV - all with nationwide price caps to ensure the new mega-DBS company doesn’t gouge cable-free rural America.

At least that’s the promise of EchoStar Communications Corp. (operator of the Dish Network DBS service) and GM’s Hughes Electronics (operator of DirecTV) on the proposed $25.8 billion marriage that would make EchoStar the U.S. multichannel leader with nearly 17 million subscribers.

The new company would retain the EchoStar name but sell services under the DirecTV brand, with EchoStar CEO Charles Ergen keeping his top spot.

The future of multichannel America may depend on the strategy of Ergen, who will have to convince the government that he is not so much dominating satellite as competing with cable, and that the "synergies" he touts will outweigh the antitrust concerns.

"The only thing clear is that the DBS industry has once again changed," said analyst Mickey Alpert of Alpert and Associates, a Washington, D.C.-based satellite research firm.


Under the merger, most of America would see its multichannel choices shrink from three to two, and rural consumers who now have two satellite choices would have just one. But EchoStar and Hughes executives are hailing instead a great new era of services that will not only benefit consumers, but which might be impossible without the merger.

"The biggest thing is we duplicate our spectrum," said Ergen of the current competition. "It’s a very limited resource … and we have customers who demand more and more services. We have to be able to consolidate that to get the efficiencies."

With their fat transmission pipe getting fatter, the companies said nothing about more home shopping channels, reruns and adult pay-per-view (EchoStar has five adult channels), but promised instead that their synergy would actually improve services, especially in rural areas.

"In terms of local service, we can add 60 new markets so people in Arkansas and Montana and Vermont and states where we don’t have ‘loc-to-loc’ service for the first time can actually get a choice between cable and satellite," he said.

The executives also chided broadcasters for failing to roll out their digital plans as quickly as some had hoped.

"While many broadcasters are taking their time about converting to digital and still want to hold onto spectrum, we’re out there offering [digital] service and willing to do more if the government will let us," Ergen said. "Together, we can actually go out there and have the capacity to put the channels up and drive that market, something the government obviously put the spectrum out there for."


The consolidation includes several new-generation satellite systems with expanded two-way powers.

"Its not only multichannel video that they’re going to dominate in the rural areas. It’s also going to be satellite broadband," said Analyst Jim Stroud of The Carmel (Calif.) Group.

"What [Ergen] does with the Ka-Band will be interesting," said Alpert, referring to the advanced satellite technology with increased potential for two-way applications. "He’s no longer just a DBS player."

But satellite Internet connections are slower than cable, and have had limited success so far.

"The delivery of interactive broadband is a very tough proposition unless we can make the economics go more in our favor," Hughes CEO Jack Shaw said in a conference call with analysts. "To be able to take a competitive offering to the rural market … (it) just seemed to us that the solution was putting the two companies together."

Putting the companies together may increase EchoStar’s spectrum and customer base, but it may also keep their hands full and hinder attempts to embark on risky interactive ventures.

"The fact that EchoStar won the bidding is probably going to set back the rollout of interactive television quite a bit in the U.S.," said Analyst Van Baker of The Gartner Group in San Jose, Calif. He said Rupert Murdoch’s News Corp., with interactive B-Sky-B already in Europe, might have accelerated interactive deployment had it landed the deal.

The executives also held out the promise of the standardization of set-top receivers, possibly building boxes that work with both systems, or eventually switching one company’s system over to the other’s technology. Both companies have experience with hardware change-outs, and executives said such a change could take four years and cost $2 billion.

Analysts and executives said it’s too soon to tell if a merger would mean the end of relationships with Sony and Thomson multimedia, which make receivers for DirecTV.


Before the companies can merge, they have to sell the plan to GM stockholders and to the federal government, namely the FCC and either the Justice Department or the Federal Trade Commission. Many observers believe the FCC, which just set up a cross-disciplinary force to examine the merger, will be the easier sell.

To sweeten the deal, Ergen has promised "nationwide pricing," or a guarantee that rural customers will pay no more than their urban counterparts.

And his talk of increased local-into-local service comes amid a lengthy DBS battle against the carry-one, carry-all policy that forces them to bring all local stations - often greatly demanded by viewers - into a local market if they bring any. The merger could approximately double the number of such local markets to 100 - something that’s not necessarily cost-effective, but which could win support of the rural viewers along with their powerful senators and help the merger’s cause.

"You’re going to pick up a good number of those homes and give them not just network systems but a local, regional service that they don’t presently have," said Media Access Project President and CEO Andrew Schwartzman, speaking of a possible strategy for the combined company. "If [Ergen] is going to commit to using some of the benefits here to really improve the service of those folks, protect them from the standpoint of cost, he may be able to enter into a deal that will mollify some of the rural concerns, and he might come up with a package that isn’t so altogether terrible."

Executives hope for federal approval within a year. The FTC and the Justice Department decide between themselves which office handles the bulk of the case and have 30 days to review the initial application for merger clearance and ask for a more detailed, second application. Nearly all the filings and government decisions are confidential until the final decision.