Satellite Broadcasters Are Intently Watching the Echo Star/Hughes Deal

The marquee deal in satellite broadcasting at the moment is EchoStar Communications Corp.’s $25 billion bid to buy Hughes Electronics Corp. But while this blockbuster deal makes headlines, smaller deals are being considered as the industry suffers from the overall economic downturn and excess capacity in what had seemed to be a promising sector. The delivery of broadband services has been a disappointment. The glut of broadband capacity by land-based carriers such as Global Crossing Ltd. has undercut the introduction of broadband by satellite. “There are some things satellite broadcasting does better than its competitors, such as provide service where no infrastructure exists, but there has been a lot of money spent on the rollout of satellite broadband services, which didn’t work out,” notes Susan Irwin, president of Susan Irwin Communications, a Washington, D.C.-based media consulting firm. One difference between satellite broadband and television broadcasting carried by satellites is that broadband requires two-way communications capacity. “Right now, broadband via satellite can be a tough sell because it is more expensive than getting access to these services via digital subscriber line or a cable modem,” says Dr. Edward Cornet, a vice president at Booz Allen Hamilton. But despite the disappointing pace at which broadband is being introduced, Irwin believes that consolidation would continue to shape the satellite communications industry. She says that in the last five years, many of the formerly regional and national satellite operators have joined forces to become global operators. The $4.3 billion acquisition of North American operator GE American Communications Inc. by the European satellite consortium SES Global SA about a year ago was a major stepping-stone in this process. In addition to broadband, the increased consolidation in the satellite broadcasting industry will speed the commercialization of other services, such as voice telephony, interactive TV, digital TV broadcasting, and data delivery. But while the industry’s strategic planners are reevaluating these uses of the satellite spectrum, the rise of EchoStar and its CEO, Charles Ergen, has been the most high-profile story in the satellite industry. “The rise of Charley Ergen has been a phenomenon, and if he succeeds in buying Hughes, he’ll have assemble an impressive collection of assets,” Irwin says. Announced in late October of last year, the combination of EchoStar’s DISH network and Hughes Direct TV, the two largest U.S. satellite TV services, would create a behemoth with 16 million viewers. Together both companies would control about 90% of the U.S. market. The Federal Communications Commission must determine whether the deal is in the public interest, while antitrust enforcers at the Department of Justice will make the call about potential anticompetitive fallout if the combination is allowed. One issue for regulators is the question of market definition. If satellite broadcasting is viewed as a single market, the deal has an obvious monopoly problem. However, Ergen has said that the appropriate market definition includes cable TV competitors, such as AOL Time Warner Inc., Cox Communications Inc., and pending merger partners AT&T Corp. and Comcast Corp. Ergen has argued that the satellite industry needs to consolidate to complete with the increasingly large cable TV players. A second issue is whether there is a danger that the newly formed company will take advantage of its near monopoly in rural America to increase prices. “A lot of the deal’s reception will swing on whether EchoStar will be able to convince regulators that they will not gouge their rural customers,” Dr. Cornet notes. Handicappers are split about the likelihood of the deal being approved. “Most people are giving it about a 50-50 chance of getting through,” says Ray Schleinkofer, a media industry analyst at Thomas Weisel Partners in New York. “My personal feeling is that it will be approved, although with some concessions.” Another industry observer, Sean Badding, vice president of business development at Carmel Group, a Monterey, Calif.-based satellite consulting group, says, “I’d give the EchoStar acquisition of Hughes about a 25% chance of getting clearance.” Badding notes that if the merger is approved, he expects EchoStar to sell off some of the Hughes assets, such as its broadband business and its set-top box manufacturing unit. Badding also speculates that if the government rejects the deal, it could work out to the advantage of Rupert Murdoch’s News Corp. Although News Corp.’s bid for Hughes was not successful the first time around, it might prevail if a second round of bidding for Hughes were to open up. “Murdoch lost out because he wasn’t willing to put up enough cash up front, but if he makes another move on Hughes in 12 or 18 months, he could win,” Badding says. The California-based analyst adds that an improved economic outlook, increased cash flow at News Corp., and presumably improved valuations of the stock might mean that Murdoch could capture Hughes in 2003 or 2004. Some observers says that an announcement by EchoStar in late February that the company will provide affordable, satellite-based TV and digital services across the nation within three years was a sign that the company knows the deal is in trouble and is moving to pre-empt regulatory objections. The February offer means that EchoStar would provide satellite-delivered local TV service to all 210 markets in the U.S. It currently supplies this service to 42 markets. The ability of a national satellite broadcaster to provide local stations is a bargaining chip that EchoStar is emphasizing as the government weighs its options. A decision is expected sometime between six months and a year after the deal’s announcement in October 2001. “While there are numerous consumer and competitive benefits from this pending merger, the ability to offer local channels to every consumer in every TV market in the country, including rural and underserved areas, certainly is one of the most compelling aspects of this deal,” says Ergen. “Today, approximately 42 million TV households do not have the option to receive local channels via satellite, and as such, have no choice but to subscribe to cable. Without this merger, many of those will never see local channels on satellite and have no choice of local television providers.” Ergen’s attempt to placate opponents of the deal who represent rural areas, and his desire to define the pact not as a merger within the satellite industry but as the only way the satellite industry can compete with cable providers, was assisted by two recent judicial rulings. These court decisions, which have negated federal restrictions limiting the size of cable companies and barring them from owning broadcast networks, could work in EchoStar’s favor. Badding also notes that the timing of the review of the cable industry’s pending mega-merger, the combination of AT&T’s cable operations and Comcast, could affect the fate of EchoStar’s deal. “It will help EchoStar if the cable deal gets approved first. It will allow it to make the case that it needs to buy Hughes because it needs to increase in size to compete with these giant cable companies,” he says.