FCC Declines to Approve EchoStar DirectTV Merger

October 10, 2002. The Federal Communications Commission (FCC) announced at a press conference that it has "declined to approve the transfer of licenses from EchoStar Communications Corporation and Hughes Electronics Corporation, a subsidiary of General Motors Corporation, to a new entity". EchoStar and Hughes both provide direct broadcast satellite (DBS) service via their Dish Network and DirecTV. See, FCC release [MS Word].

The FCC also announced that it has issued an order "designating the application for a full evidentiary hearing before an Administrative Law Judge". However, the order allows the parties 30 days to amend their application to include major revisions designed to address the anti- competitive impact of their proposed merger.

The FCC's decision departs from the recent pattern in license transfer proceedings associated with major mergers. First, in this case, the FCC reached its decision before the Department of Justice's Antitrust Division reached its decision in its antitrust merger review proceeding. Second, the FCC declined to approve the transaction, and all but rejected the idea the the transaction could be revised or restructured. The FCC has more often approved transactions, after extracting changes in the terms, and imposing continuing obligations on the merged entity.

One winner in today's decision may be News Corp., which now has another shot at acquiring DirecTV.

All four FCC Commissioners supported the decision. All four released separate statements. Chairman Michael Powell wrote in his statement [MS Word] that "The combination of EchoStar and DirecTV would have us replace a vibrant competitive market with a regulated monopoly. This flies in the face of three decades of communications policy that has sought ways to eliminate the need for regulation by fostering greater competition."

Michael PowellPowell (at right) added that "The record before us irrefutably demonstrates that the proposed merger would eliminate an existing viable competitor in every market in the country. The case against approving the transfer application is particularly compelling with respect to residents of rural America who are not served by any cable operator. Those Americans would be left with only one choice for their subscription video service, now and in the foreseeable future. But that alone is not the cornerstone of our decision. At best, this merger would create a duopoly in areas served by cable; at worst it would create a merger to monopoly in unserved areas."

Commissioner Kathleen Abernathy wrote in her statement [MS Word] that "this proposed merger will likely harm consumers by eliminating a viable competitor in every market, driving up prices, and decreasing innovation and quality of service."

Commissioner Michael Copps wrote in his statement [MS Word] that "it would be an enormous risk to approve a transaction that results, at best, in the merger of a duopoly into a monopoly in a critical sector of multi channel video programming."

Commissioner Kevin Martin wrote in his statement [MS Word] that "I believe EchoStar currently is violating the must carry provisions of the Satellite Home Viewer Improvement Act (``SHVIA´´) and FCC rules by placing some broadcasters' signals on a second dish. I continue to be concerned about the burden this practice places on consumers and the impact this discrimination may have on some broadcasters -- particularly public broadcasters. I therefore dissent in part, on the majority's decision not to include EchoStar’s compliance with its must carry obligations among those issues designated for hearing."

Consumer Groups' Reactions. Two consumer groups offered criticism of the decision. Gene Kimmelman of the Consumers Union stated in a release that "this merger could have been structured in a way that actually helped consumers by making satellite TV a legitimate competitor to cable TV. Cable companies have a monopolistic grip on the vast majority of communities in America. Satellite companies haven't been able to compete head to head with cable because they cannot offer local TV channels in many places."

He continued that "The combination of EchoStar and DirecTV would have freed up enough spectrum for the merged company to offer local channels across the country. The FCC could have required the company to meet this goal. Satellite could have posed a serious threat to cable monopolies under the proper conditions. But the FCC today opted for the more narrow minded route and voted to block the merger. It's hard to understand how the FCC thinks that it's helping consumers by blocking, rather than restructuring, this deal. It was bad enough for consumers when Congress deregulated cable monopolies and allowed rates to skyrocket. But for regulators and antitrust officials to hinder efforts to make satellite more competitive with cable simply adds insult to injury."

Similarly, Mark Cooper of the Consumer Federation of America stated that "Yet again the Bush Administration votes in favor of monopolies. Today, the FCC rejected the merger of satellite competitors EchoStar and DirectTV while the Justice Department has failed to block the AT&T Comcast cable merger. The Administration lets cable monopolies flourish while it crushes potential competition from satellite. Even the Wall Street Journal today recognized that in order for satellite to compete with cable it needed more capacity and a bigger marketplace. What these decisions do is tip the scales in favor of the cable monopolies that will continue to raise basic cable rates and high speed Internet charges all to the detriment of consumers."

Satellite Broadband. The parties to the merger had argued that the merger was necessary to upgrade facilities to provide high speed Internet access service via satellite. They further argued that this broadband service could compete with wireline broadband providers, and in some rural areas, be the only provider of broadband services. One argument was that they needed to pool their spectrum to be able to provide broadband service.

However, the FCC rejected this argument. It wrote in its press release that "Competition to cable modem and DSL products from satellite providers would be a significant advance, but the claimed efficiency benefit here is weaker than in the MVPD market. There is no spectral efficiency gain because each broadband customer uses additional spectrum, regardless of the number of providers. The companies have failed to substantiate that their claimed broadband benefit was likely to occur or that the merger was necessary to achieve it."

Another argument advanced by the parties to the merger was that neither alone could attract the capital necessary to launch this new broadband service.