‘Marriage Made in Heaven’ Would Be Good News for Consumers

Published April 1, 2002

Last October, in an announcement with major implications for rural America, the nation’s two major digital satellite television service providers announced plans to merge. Since then, debate has raged over whether this “marriage made in heaven” would benefit consumers or should be stopped by federal officials.

If the plan is approved by state and federal authorities, EchoStar Communications, which operates the DISH network, would merge with Hughes Electronics, which operates DIRECTV. The combined company would start with more than 16.7 million subscribers, about 91 percent of the satellite television market, though only 17 percent of the pay-television market, which includes both satellite and cable delivery.

Important for rural America

Many rural Americans are familiar with RFD-TV, a network dedicated to rural America available on the DISH Network since December 2000. The network features Farm Bureau news and information each evening from 7–8 CST, with broadcasts repeated the next day.

The merger of EchoStar and DIRECTV would allow the companies to pool their licenses and bandwidth to provide local network channels, something currently possible in only 40 television markets. The combined company would be able to offer local channels in over 100 markets.

The merger is also important to rural America because it promises to expand access to broadband data services. Less than 5 percent of small towns and rural communities now have access to broadband via digital subscriber lines (DSL) or cable operators. Broadband means faster, more reliable, “always on” access to the Internet, with such applications for farming as field-specific weather, crop modeling, pest alerts, prescriptive irrigation scheduling, and real-time exchange of in-field conditions and remote sensing data.

In a statement announcing the merger plan, EchoStar Chairman and Chief Executive Officer Charles Ergen said the merger would result in “cost savings from the elimination of costly duplicate satellite bandwidth and infrastructure” and enable satellite television “to compete more effectively against the dominant U.S. cable and broadband providers.” The combined company would “increase significantly the number of markets served with local channels via satellite, provide additional channel offerings, increase high-definition TV (HDTV) offerings, accelerate the introduction of next-generation high-speed Internet services, and offer nationwide competitive prices.”

According to Ergen, “Together, EchoStar’s DISH Network and Houghes’ DIRECTV can provide a range of services that would bridge the ‘digital divide’—providing high-speed broadband solutions to consumers and businesses. Importantly, these services would be available in rural areas otherwise far from the information superhighway at rates which the company is prepared to assure regulators would be competitive.”

Opposition voiced

Opponents of the merger observe it would reduce the number of options available to many consumers from three (EchoStar’s DISH Network, DIRECTV, and cable) to only two (DIRECTV or cable). They contend the merger would give the new company excessive market power against competitors and the ability to raise prices to captive customers.

Rupert Murdoch’s News Corporation and groups allied with or funded by the company are leading a lobbying effort to have the Department of Justice and Federal Communications Commission halt the merger on antitrust grounds. Murdoch’s News Corporation sells programming, such as Fox News and FX, to both cable and satellite operators. The merger is expected to give News Corporation less leverage in negotiating distribution deals. Murdoch also bid against EchoStar for DIRECTV and lost.

Also opposing the deal is the “Western Caucus,” a bipartisan coalition of members of Congress representing primarily Western and rural districts. According to a letter sent to U.S. Attorney General John Ashcroft and Michael Powell, chairman of the Federal Communications Commission, the group’s members “have grave concerns that such a merger may increase costs and decrease options for our constituents who want” direct broadcast satellite television service. “The result for rural America,” they write, “will be a monopoly with essentially no hope for future entrants.”

The merger defended

Experts, however, say it is wrong to focus on the loss of one competitor from the marketplace. Instead, policymakers should weigh the increased competitive pressure on cable providers that the EchoStar/DIRECTV merger would bring about.

Harold Furchtgott-Roth, a visiting fellow at the American Enterprise Institute, contends the correct definition of the market affected by the deal is not satellite-based broadcasting, but any means of obtaining video and other types of electronic data, including traditional television broadcasters, cable television, and even videocassette players, DVD players, and broadband services over the Internet.

Malcolm Wallop, a former U.S. Senator from Wyoming, says he has seen the positive impact a strong satellite industry can have on cable and telephone companies that otherwise enjoy a “cozy monopoly” in many rural areas. In an essay published in the Rocky Mountain News in late January, Wallop wrote, “The satellite industry has a strong track record of serving rural areas, not with promises but with programming. This is especially true in the West. Satellite providers deliver service in areas other companies literally won’t go near.”

The proposed merger, according to Wallop, “would be a competitive shot in the arm for the whole pay-TV market. … The competition from satellite put the heat on cable providers to roll out new services for customers, including digital broadband services. That’s how a competitive free market is supposed to work.” He goes on to call the proposed merger “a winner for everyone,” and for many rural areas of the West, “the only affordable ticket to the digital future.” Similar reasoning has led the American Farm Bureau Federation to urge Congress to allow the merger to go through.

Fear that the combined company would use its dominance in the satellite arena to raise prices is further relieved by EchoStar and DIRECTV’s pledge to continue to offer uniform, nationwide pricing for television programming, which means rural customers would benefit from competitive pricing occurring in urban settings. The merger makes such a pricing system easier to maintain, with obvious benefits for rural residents.

Murdoch’s opposition to the merger seems founded on self-interest and not an altruistic concern for the public’s best interests. Murdoch’s News Corporation would likely emerge as the winner in a second round of bidding for DIRECTV if regulators were to forbid the merger with EchoStar. As EchoStar’s Ergan told The New York Times, Murdoch’s “agenda is to scuttle the merger and pick up Hughes for cents on the dollar.”

Murdoch also recognizes that the stronger negotiating position of EchoStar/DIRECTV means lower profits for providers of programming such as News Corporation. This is only partly because EchoStar and DIRECTV will no longer bid against one another for desirable programs. The new company is in a much stronger position to secure programming from competitors of News Corporation, as demonstrated by an agreement between EchoStar and Vivendi Universal announced just two weeks after the merger application was submitted to the FCC.

Technology experts Wayne Crews and Adam Thierer, both at the Washington DC-based Cato Institute, say regulators should approve the merger. “It will take vast resources to build the broadband networks of tomorrow, and mergers on an unprecedented scale will be part of the market processes required to make it happen,” they write. “The regulatory mentality that seeks to mold the communications marketplace to fit its own misguided vision will simply discourage investment in crucial new facilities-based networks.”

Joseph L. Bast is president of The Heartland Institute, a nonprofit organization based in Chicago, Illinois. He can be contacted at [email protected]