Antitrust Star Wars: Merger Review Extends to the Heavens

For nearly two years, General Motors (GM) listened to offers for Hughes Electronics, its subsidiary satellite operation that owns DirecTV and boasts over 10 million subscribers. During that time, two businesses positioned themselves to capture Hughes’ considerable satellite assets and customer base: EchoStar , a rival satellite provider, and News Corporation Ltd. , owner of the FOX networks and Sky Satellite, among other holdings. The auction ended late in October, when GM accepted a $26 billion cash and stock bid from EchoStar.

The deal would unite the nation’s top two retail satellite companies, leaving the combined business with about 90 percent of the satellite programming market. Antitrust regulators at the Federal Communications Commission (FCC) and Department of Justice (DoJ) usually frown on such concentration, which means the merger review may hinge on whether regulators view satellite programming as a distinct market, or as a technological alternative to other multi-channel platforms, including cable television. If regulators restrict their notion of competition to only satellite programming, or believe that competition over the existing satellite infrastructure and spectrum is in the “public interest” , they may attempt to block the merger in its entirety, impose new regulations on the business, force the company to sell specified assets, or transfer spectrum licenses to competitors.

Such action would be unwarranted for two reasons: First of all, to presume that no technology will emerge to compete with satellite is to ignore its own development. The advent and growth of satellite television has been a direct response to public dissatisfaction with cable service. Satellite offered consumers a technological alternative with more channels, new programming features, and exclusive content that cable did not provide. As the customers flocked, cable companies responded by investing billions to upgrade existing cable networks to provide Digital Cable, which matched satellite’s 200 channels and improved navigation. As a result, today’s consumers enjoy better technology, more choices, and much lower prices relative to service.

Secondly, a combined satellite firm will be able to compete with cable’s less burdensome cost structure and huge edge in broadband deployment. In addition to the cost of the physical infrastructure, cable and satellite companies must also pay for content. The more subscribers a firm has, the lower the price it can negotiate from television programmers. A combined satellite company would have the subscriber base to reduce its content costs to the level of the large cable companies, like AT&T Broadband and AOL Time Warner , which will push down prices for consumers .

While it is true that current satellite spectrum allocation is not without its problems, as it has left some willing businesses unable to acquire the spectrum necessary to offer service, there is some doubt as to whether or not smaller competitors have the finances to launch their own satellites and cover the fixed costs necessary to operate a satellite television and broadband network. Even if they do, it does not necessarily mean that the FCC should divert spectrum for such use: Regulatory intervention to correct an imbalance caused by previous regulatory intervention is a vicious cycle that encourages business to invest in lobbying and influence peddling instead of products and infrastructure.

Dividing scare spectrum at this point by forcing EchoStar to transfer spectrum and orbital positions to Pegasus, a smaller rural Satellite provider, could undermine the development of new technology and deprive consumers of broadband alternatives. Public interest regulations already limit efficient spectrum allocation; forcibly transferring spectrum would only exacerbate the problem.

As of January 1st, Federal law will require satellite providers to carry all of the local broadcast stations in a market if it chooses to carry any. This means that if DirecTV wishes to offer the local ABC, CBS, NBC, and FOX affiliates in Los Angeles, it must carry all 20 local broadcast stations, no matter how low the viewership. In total, if satellite companies wish to service every local market, they must allocate enough spectrum to carry all 1,500 local broadcasters: Something that is doable, but irrational. If these additional broadcast stations are highly valued by consumers, they would be included in the package without government fiat.

As analysts have noted, the main benefit of the EchoStar-DirecTV merger is that duplicative TV spectrum can be put to new uses, including broadband and high-definition television. To inhibit efficient spectrum allocation by compelling satellite to set off more of its spectrum for unwatched television stations, or to shed available spectrum to competitors, is to deprive consumers of new content and applications.

As web-based applications and content command more and more of consumers’ entertainment dollars, satellite firms find themselves at a technological disadvantage. Hughes’ Electronics broadband Internet service, DirecPC, offers download speeds on par with cable modem and high-end DSL service, but uploading data takes place over the old 56K telephone line. This slows the entire Internet experience and may also detract from interactive television, which also depends on upload speeds. A single satellite firm could not only reallocate existing spectrum towards the more efficient delivery of these services, but also use the cost savings from the merger to invest in new technology to better serve this market.

Whatever the FCC and DoJ decide, three things are certain: the merger review will be contentious, lengthy , and very expensive (EchoStar has retained the services of Gore attorney David Boies). The quaint notion that GM-Hughes shareholders should be free to sell their property to whomever they wish, on whatever terms both sides find mutually beneficial, will be checked at the door. Both EchoStar and its industry rivals will present evidence as to why the merger will either benefit or harm competition, without so much as questioning the value of a system that ignores property rights and arbitrarily favors some multibillion-dollar firms over others.

For example, if the merger between $12.7 billion Hughes Electronics and $12.5 billion EchoStar fails, it will be a huge victory for $34 billion News Corp., which will be the only remaining suitor for GM’s satellite property. Clearly, this information was incorporated into merger negotiations and News Corp.’s overall acquisition strategy. If the merger is now blocked, GM shareholders stand to lose billions of dollars as a result. Shouldn’t the government have some responsibility to compensate them for taking a portion of their property in accordance with the 5th Amendment?

Not, according to U.S. law, if the deal violates Section 7 of the Clayton Antitrust Act , or the “public interest” standard of Section 309 of the Communications Act. Unfortunately, both statutes are laced with such indeterminate language that the merger review process emasculates property rights in favor of a gobbledy-gook of imprecise legalese that can only be interpreted by high-priced lawyers after months of analysis.

This is not a bad system for D.C.-area residents who bill for their services by the hour, but is a horrible system for consumers as millions of dollars that would otherwise be in the hands of entrepreneurs and innovators go towards lobbying and legal fees. And the more successful the protestations of EchoStar’s rivals, the more resources will be diverted from productive use towards merger review on the next go-round.

The DoJ and FCC should recognize the economic costs of a lengthy and acrimonious review and minimize them by expeditiously approving this merger.