DirecTV, EchoStar Merger Rumors Rampant

Should they actually look to merge, the firms’ best shot at regulatory approval would come while the current Congress and Administration are still in office, analysts agreed Wed. Waiting until after the 2008 election would likely bring lower odds of success, they said. Counting backwards from the Nov. 2008 election, and assuming a year-long regulatory review, a merger proposal would have to be on the table before Thanksgiving, said Sanford Bernstein analyst Craig Moffett in a Wed. research note.

But hotly contested is how much the TV landscape has changed since the FTC killed the proposed Hughes-EchoStar merger in 2002, and whether video competition from telcos will be enough to convince Washington of the acceptability of a DBS merger. Many in the satellite industry are skeptical, saying antitrust and political issues are even more complicated than they were 4 years ago. “Yes, the tide is turning, but not quickly enough to get this through quickly. This is something that probably needs to wait another 3-5 years,” said Carmel Group’s Jimmy Schaeffler.

“Even if a merger-friendly Republican FCC could conceivably approve the combination, the FTC would pose a very high hurdle. After all, it was the FTC -- not the FCC - - that killed their proposed merger in 2002, on the argument that competition in rural markets (i.e. underserved by cable) would go from two suppliers to one,” said Moffett: “Nothing proposed by the RBOCs in the time since would change that calculus one iota.”

Then there’s “the 900-lb gorilla issue of [News Corp.’s] vertical integration,” Moffett said. The failed attempt at a merger 4 years ago was between an unaffiliated EchoStar and an unaffiliated DirecTV. “This time it would be totally different” for competitive and political reasons, Moffett said: “News Corp. involvement would mean a vertically integrated behemoth rivaling Time Warner, only with more than twice Time Warner Cable’s distribution muscle… and without putting too fine a point on it… handing what would be, by far, the largest distribution platform in the country to Rupert Murdoch (and Roger Ailes and company at Fox News) might not sit well with the Democrats.”

Mixed in with merger speculation are questions of whether a wireless broadband investment is also imminent. Many see an effective broadband strategy as critical for DBS competition with cable and telco service bundles. DirecTV and EchoStar have been known since Dec. to be cooperating on a wireless broadband venture (CD Dec 5 p2). But broadband questions have lingered unanswered throughout the 2nd quarter, despite promises by News Corp. CEO Rupert Murdoch and DirecTV CEO Chase Carey that a plan was imminent. The firms’ latest wireless broadband maneuver is a joint FCC AWS auction application under the moniker “Wireless DBS” (CD July 11 p1). The 50-50 Wireless DBS joint venture allows the 2 firms to bid for wireless spectrum together in Aug.

U.K. DBS counterpart BSkyB answered the broadband question Tues., surprising competitors from BT to NTL with a Pounds 400 million plan to provide free DSL broadband to all its satellite TV customers (CD July 19 p7). But while the BSkyB move may put some broadband pressure on DirecTV and EchoStar by association, it “won’t have any direct lessons yet for the U.S.,” said Tellus Ventures Pres. Steve Blum. Put simply, BSkyB will use existing network infrastructure, gained in the 2005 acquisition of Easynet, for its broadband play, Blum said: “U.S. DBS players don’t have an existing network.”

“BSkyB is, however, in the position to set trends and suggest to their U.S. brethren where they need to go,” Schaeffler said: “With the AWS spectrum auction coming up, EchoStar and DirecTV are going to be pressured to come up with some answers along the same lines.” The primary barrier for entry into terrestrial wireless broadband business “is the licensed spectrum. My guess is they're going to go after everything they can get,” said Blum.

A joint wireless broadband play could be used as a strategy to push for regulatory approval of a merger, some analysts suggested. “We suspect the two companies could argue that while the video business could become less competitive (pro forma), the wireless voice and data business could become more competitive if the DoJ and FCC allow the two DBS firms to merge,” said Citigroup analyst Jason Bazinet in a Wed. research note. Citigroup Wed. upgraded EchoStar to “Buy” from “Sell” based on “potential M&A” rumors.