FCC SHOOTS DOWN ECHOSTAR ACQUISITION OF HUGHES AND DIRECTV

Commission rendered moot request by DBS companies to delay decision until they could make structural changes in plan. Commission did, however, set full evidentiary hearing before administrative law judge. FCC last held such administrative hearing in 1970, Gen. Counsel Jane Mago said. She said process usually took 45-90 days to begin. In hearing, ALJ would seek additional evidence supporting benefits of deal, as well as evidence of anticompetitive harms, with burden of proof on EchoStar and DirecTV.

In joint statement, General Motors, Hughes and EchoStar said “they were disappointed” that decision was designated for administrative hearing, but said they “would continue to work aggressively within the context of FCC process to achieve approval of the merger.” Companies said they didn’t want to comment further until they had time to study complete order. EchoStar-Hughes has 30 days to file amended application and to file petition to delay hearing. FCC officials weren’t sure when it last ruled on important such case prior to DoJ. “We've never tried to wait for DoJ,” Cable Bureau Chief Kenneth Ferree said: “Our standards are different.”

Likelihood of deal harming competition in multichannel video program distribution market outweighs any benefits that it might have produced, Commission said. FCC found loss of competition within MVPD market would hurt consumers by: (1) Eliminating existing viable competitor in every market. (2) Creating potential for higher price and lower quality of service. (3) Having negative impact on future innovation. Commission also said deal would have reduced competition to 2 competitors from 3 in some markets and to 1 from 2 in other rural areas. EchoStar was hoping Commission used broader market definition.

FCC didn’t buy argument that merger was needed to compete with cable. It said studies showed DBS was growing at faster rate than cable. “These are not failing firms,” Commission said: “Both DirecTV and EchoStar continue to enjoy growth rates that many companies would envy,” while growth rates for cable were flat. Agency said EchoStar and DirecTV could serve 85 of top 100 markets with local-into- local TV service as independent companies. It said takeover wasn’t needed to roll out broadband services.

Last-min. plea by EchoStar didn’t affect timing of decision, Ferree said. “When we had the record complete, we were ready to act.” He said there was question whether EchoStar would fulfill obligations as stated if acquisition were approved. Despite appeal process and opportunity to present new plan that might include conditions and divestiture of spectrum, “EchoStar has quite a hill to climb” to reverse decision, Ferree said “we'll look at anything. Tell me what remedies” companies were going to offer. “It’s not clear to me that there is an easy or quick fix,” he said.

Plan by Cablevision and SES to launch DBS wouldn’t be competitive match in marketplace for EchoStar-Hughes competitor, FCC said, but Ferree said EchoStar never made proposals that involved SES or Cablevision. Cablevision made its proposal independent of EchoStar and DirecTV 3 months ago, Ferree said. “They would have zero subscribers,” he said.: “We would be looking at years out until any serious competition would be provided.”

Bottom line in decision was loss of competition, Ferree said: “Our calculation of consumer welfare losses were staggering.” If deal had been approved, he said, New EchoStar would have controlled all 3 full Conus slots allocated for DBS service. “The risks of harm were enormous,” Ferree said. “There is no other case where FCC” had allowed one company to control all of spectrum. He said each of EchoStar’s proposed benefits “suffered from infirmities.” He said only “remedy for potential harm” was national pricing plan, structural regulation and behavior requirements. In that case, Ferree said, “the cure might well be worse than the disease. National price doesn’t necessarily mean a low price” for consumers.

Comr. Abernathy said acquisition probably would harm consumers by “driving up prices.” She said proposed deal would “substantially increase the level of concentration in an already highly concentrated market.” Abernathy said at best merged company would be “duopoly” and “at worst “monopoly” in markets where there weren’t any other MVPD providers. Comr. Copps said he didn’t see how “consumer benefits” claimed by DirecTV and EchoStar that resulted from deal would “actually be realized, much less guaranteed.” Rural groups that opposed takeover also affected his vote, Copps said. He said EchoStar and DirecTV would have been better served by presenting “best deal up front.”

Comr. Martin issued partial dissent on majority’s decision not to include EchoStar’s compliance with must-carry obligations to be among issues designated for hearing. Copps also said he might have voted differently if DBS companies had presented plan to divest spectrum and introduce new competitor. Martin said “the idea is interesting, but the applicants have made no such proposal. Failing to fully explore such options could be a missed opportunity to bring more competitive choices to consumers.”

Meanwhile, EchoStar CEO Charles Ergen attacked what he said were “misconceptions” that his company’s acquisition of Hughes would mean higher prices for consumers. “That’s clearly not the case and we weren’t going to do anything but get the lowest possible prices out there,” Ergen said at Satellite Bcstg. & Communication Assn.’s SkyForum Wed. in N.Y.C. Ergen also argued that without added bandwidth combined company would have, DirecTV and EchoStar “won’t be able to compete [with cable] for all 100 million [multichannel video] homes” in U.S.

Ergen dodged many questions on EchoStar’s options if deal with DirecTV collapsed, including whether his company would be required to pay $600 million break-up fee. DirecTV Chmn.-CEO Eddy Hartenstein had said earlier that companies would part should deal not be completed by Jan. 21 deadline in sale agreement and that EchoStar would be required to pay maximum $600 million break-up fee and buy Hughes’ PanAmSat for $2.7 billion. “It was a very simple question: ‘Do you want to have 2 weaker satellite companies competing against the stronger cable companies or would you rather have a strong satellite industry taking on a strong cable industry?” Ergen asked. “We didn’t take lightly the government’s concerns about concentration, but that was not something on which we agreed on what the effect would be.”

On whether combined company would consider transferring orbital slot to potential competitor as condition of approval, Ergen said it was being considered. Cablevision’s effort to secure 17 frequencies at 61.5 degrees W for satellite service is “credible,” Ergen said, and satellite for that service is scheduled to launch in March. “He is a viable competitor and a very credible businessperson with a great track record,” said Ergen referring to Cablevision Chmn. Charles Dolan. Ergen also continued to maintain that collapse of agreement would mean less bandwidth for high- definition programming. “This merger brings the high- definition signal to everybody,” he said. “If the government was concerned about choice, we'd be talking about multi-unit dwellings where 22 million people have only one choice which is the cable company that has a perpetual contract to provide the service.”

Decision “provides an opportunity for a restructured plan that will expand competition,” Cablevision Chmn. Charles Dolan said: “The divestiture of spectrum we have proposed is a reasonable structural remedy that will not only answer concerns about reduced competition, but will also result in more satellite viewers receiving local programming from multiple sources in markets nationwide.”

FCC “opted for more narrow-minded route and voted to block the merger,” Consumers Union Senior Dir.-Public Policy & Advocacy Gene Kimmelman said: “It’s hard to understand how the FCC thinks that it’s helping consumers by blocking, rather than restructuring, this deal. The merger raised concerns, but it could have been structured in a way that helped consumers by making satellite TV a legitimate competitor to cable.”

If FCC “had been willing to take its blinders off,” combination of DirecTV and EchoStar could have freed up enough spectrum for companies to provide local channels and provide real competition to cable, Kimmelman said. Commissioners “unanimously recognized the harmful effects the merger would have had on rural consumers and it has taken an action that will preserve competition and choice in rural areas,” said National Rural Telecom Coop Pres. Bob Phillips. NAB Pres. Edward Fritts said “a competitive satellite marketplace will help reach satellite goal of local carriage in all 210 markets “faster than through a single monopoly provider.”

EchoStar-Hughes deal is “in very critical condition,” Legg Mason analyst Blair Levin said: “Proposed changes probably won’t alter the decision.” Reversal is “highly unlikely, given the intensity of Commission’s resistance.” It’s “unlikely FCC would act to reject the deal unless it had a high level of confidence that the DoJ were also likely to oppose it,” he said. Levin said he didn’t “completely dismiss the possibility of negotiated conditions, [but] the odds of that, which were always low, are diminishing.” Levin said any court case favors govt. because it “doesn’t block mergers often, but when it does, the court generally supports it.”

“The writing is on the wall on possibility of this getting done” said antitrust attorney Charles Biggio of Akin, Gump, Strauss, Hauer & Field. Biggio, former asst. attorney gen. in DoJ Antitrust Div., said: “EchoStar isn’t going to be able to divest a business. They have to create a new business and give it to somebody that’s not in the business… Pegasus may be a possibility,” but DoJ is probably going to require more “than what EchoStar is willing to do.” Biggio said News Corp. posed best option. “Rupert Murdoch probably could get it through with some concessions,” but what price is he now willing to pay, Biggio asked: “He probably couldn’t get it through cleanly, but I suspect the FCC and DoJ wouldn’t be so opposed to it.”