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Heating up the DBS market

Fri, 11/30/2001 - 7:00pm
Duffy Hayes

Google Factor: 4,640

Would you play poker with Charlie Ergen? The persuasive chairman of satellite TV provider EchoStar Communications threw the direct-broadcast satellite business into controlled chaos in late October by successfully bidding to gain control of the largest satellite TV player in the U.S., Hughes DirecTV Inc. Though regulatory and investor issues still need to be resolved before the nearly $26 billion deal can be truly consummated, the new EchoStar will potentially have 16.7 million customers, or close to 90 percent of the U.S. direct-satellite market.

For Poker Charlie, now the long journey toward industry acceptance and federal regulatory approval begins. At its core, satellite TV service is most important in serving rural areas where cable doesn't reach, so Ergen will be hard-pressed to convince Congressional leaders from rural states that a consolidated satellite company with more than 90 percent market share will be positive for the rural market in general.

But where Ergen must do the most convincing is at the Department of Justice, where anti-trust issues will be most scrutinized. The spin has already begun from the leaders who forged the deal; Ergen is positioning the new EchoStar as a competitor to the cable industry, which currently controls 80 percent of the pay television market. A combined DirecTV/EchoStar would only constitute 17 percent of that competitive market, hardly anti-competitive.

At the heart of this competitive issue are broadband and other advanced services, which Ergen has already tied to DBS's run at cutting into cable's competitive lead. He points to the potential of broadband satellite services being rolled out much faster under a combined satellite entity, which already had been marketed by EchoStar under the StarBand brand name. Regulators will likely be anxious to support any effort that spurs activity in the broadband services market, so the potential for two-way Internet service will be a real focus for Ergen going forward. Other advanced services like high-definition television and PVR functionality are likely to be included in Ergen's pitch as well.

Opposite Ends of the Table

Every poker player needs a nemesis, and in this deal, Ergen's opponent was the global media magnate Rupert Murdoch. Essentially, Ergen went "all-in" and Murdoch balked at the hand he was dealt. Murdoch had visions of a global satellite TV network that included the plum North American market (he has satellite networks throughout Europe, Asia, and much of the rest of the world), but EchoStar seemed to swoop in here and swipe the initial momentum from Murdoch's News Corp.

But many analysts warn not to underestimate Murdoch; at some point down the road he could still make a play for the combined EchoStar system. He and Ergen have worked on deals in the past, and Ergen has made no secret that he and Murdoch's paths are bound to cross some time in the future.

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