Tough Regulatory Scrutiny, Reduced Competition Ahead if Dish, DirecTV Merge, Observers Say
A merger of Dish Network and DirecTV would have a very tough time getting a nod from the FCC and antitrust regulators, some media observers and analysts said. Dish Chairman Charlie Ergen approached DirecTV CEO Mike White with an interest in merging the two direct broadcast satellite companies, a Bloomberg report said this week. Last year, Ergen said a partnership with DirecTV is a “doable deal” (CD Aug 2/13 p9).
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As a straight up horizontal merger, a combined Dish/DirecTV deal would receive significant scrutiny from regulators, said Bruce Beckner, a cable lawyer at Garvey Schubert. Getting that approved would be very difficult “because essentially, DirecTV and Dish are the competitors to the existing wire-based company,” he said. “It’s really hard for me to see a successful case that could be made for this kind of an acquisition,” he said. “I don’t think that either company can call itself a failing company,” where Dish or DirecTV can claim that if it weren’t acquired by a competitor, it would go out of business, he said.
The companies could claim that they are taking action to remain competitive with telcos offering TV, voice and Internet, Beckner said. “They'd probably want to say that with the advent of triple-play services being offered by cable and phone companies ... that a DBS company has a much more difficult time competing with that,” he said. However, it’s hard to see this going anywhere, he added.
If the DBS companies plan to merge, the proposal should face the same level of scrutiny as the last time they tried in 2001 when Dish was known as EchoStar, said Matt Wood, Free Press policy director. “There’s something in the air suggesting that now is the time to jump in and get bigger,” he said. There seems to be an “arms race mentality,” he said, referring to the speculation around the DBS companies and the efforts by Comcast and Time Warner Cable to merge. The FCC and antitrust authorities shouldn’t permit the arms race in the first place, he said. The prices are going up for video services, he said: “Rather than taking the approach that ‘if you let one merge, let the other,’ they should say ‘let’s not have consolidation happen on either side.'"
A combined Dish/DirecTV can change the competitive landscape significantly, Beckner said. Dish and DirecTV are often the only pay-TV choice in rural areas and combining them would reduce an option, he said. “Under a traditional economic analysis in antitrust, that’s not something you want to have happen.” DirecTV and Dish compete now and often are the only competition against the incumbent cable company, Wood said. Not everyone can get satellite, but for some people it’s the only option, he said. “Maybe there are, at most, three options and combining the two satellite options drastically decreases the number of choices for those people."
Regulatory risks are high, said Citi analysts. If the Department of Justice uses the Herfindahl Index to access the merits of the merger, “we expect the transaction to face material antitrust scrutiny,” they said in a research note (http://citi.us/1g4z8n8). “We expect the DBS firms to concede that the video market will become less competitive on a pro forma basis.” One of the major concessions likely will be an aggressive buildout of Dish’s 56 MHz of wireless spectrum “to bring new competition to the consumer data market (to compete with cable modem and telco DSL/fiber data services),” they said. “We assume this will cost $5 billion.”
Regulators don’t seem apt to warm up to consolidation, said Wells Fargo analyst Marci Ryvicker. “Our recent experience with the FCC was quite negative when it came to the topic of consolidation, so we don’t really know how to handicap this potential transaction when it comes to the regulatory hurdle,” she said in a research note. So while a conversation between these two pay-TV providers could be a natural post-Comcast/Time Warner Cable, “we aren’t convinced that a formal announcement is imminent,” she said.
A key part of the DBS companies’ argument will likely be “that the relevant product market is no longer just pay TV but the bundle,” and that the economics of such a merger would permit the merged company to build out wireless broadband with Dish’s spectrum, said Paul Gallant, a Guggenheim Partners analyst. “So if regulators accept the ‘bundle’ market definition, then Dish-DirecTV could actually be seen as pro-competitive with cable and telcos’ triple-play packages,” he said in a research note.
Wood rejected any argument that allowing such a merger would give a multichannel video programming distributor more leverage against a programmer during retransmission consent negotiations. An MVPD reducing retrans costs for itself doesn’t mean that costs will go down for its subscribers, he said. “We don’t see those costs savings passed along in the absence of competition.”