U.S. DBS: Does One Size Fit All?
By Jimmy Schaeffler
Say what you will about competition, it works.
Clearly, there can be no better example of competition at work than the growth of the Direct Broadcast Satellite (DBS) industry in the United States during the past eight years. Eighteen million people, or nearly one in every five U.S. television households (TVHHs), have made DBS their primary form of video entertainment. Slightly less than one in five U.S. subscription TV customers take signals from either DirecTV or rival Echostar. This many people have chosen satellite TV over other multichannel video programming distribution (MVPD) services because competition provided them with the affordable choice that has revolutionized TV as we know it.
Additionally, most in today’s telecommunications industry would be hard pressed to say that anything other than pure competition from five different DBS competitors has forced U.S. cable to move quickly to significantly upgrade what was once the paradigm of an “entrenched monopoly.” In fact, most would venture to position that a strong majority of the 10,000 or so U.S. cable systems would have been years and possibly decades or more away from upgrading, had it not been for competition from the U.S. Satellite Broadcasting, Primestar, Alphastar, Echostar and DirecTV DBS entities that challenged them for customers outright.
Yet, there is irony in this competitive message. With the proposed merger of Littleton, CO-based Echostar with El Segundo, CA-based DirecTV, the very clear prospect of less competition within the ranks of the MVPD players has become strikingly evident. This leads to the possibility, as is the case whenever there are fewer competitors in a market, of higher prices, less value, less innovation, and a decline in services or products for consumers. New entrants would also be more likely to be discouraged. These negatives are the types of things that good competition battles, and they are the reasons why, in the overwhelming majority of situations, more competition is the mantra of our economic system, and not the other way around.
Nonetheless, a merger of the two DBS service providers also carries with it clear arguments of efficiencies in infrastructure utilization, marketing, management, bandwidth sharing, and a wide range of other values that would arise from any similar alliance, in just about any other business.
Weighing The Pros And Cons
In its own right, few mergers have ever been as extraordinary, and few have ever had the potential to affect the entire population of the United States.
Moreover, one reason the Echostar/ DirecTV merger is so hard to fathom is because it is so unique. For one thing, a fair number of people are unsure about whether DBS itself has created its own industry. This would be an industry that is different enough from other MVPD services to be classed separately. Or, the question arises: Should DBS be considered the same as cable, wireless cable [(a.k.a.: multipoint multichannel distribution service (MMDS), Satellite Master Antenna TV (SMATV), C-band satellite (i.e. large dish satellite), telephony-supplied digital subscriber lines (DSL), and other potential MVPD services? ]
It is also a unique merger because many people question whether the two DBS rivals compete only against cable–as they both now so adamantly profess. This is vitally important to the Echostar/DirecTV alliance because their successful antitrust argument may well turn on a finding that they do not significantly compete against one another.
In addition, the merger involves an industry that once included numerous providers and now involves two merging into one, thus creating a clear DBS monopoly. All along, the government has been closely involved and quite active in the industry’s progress, whether in its early creation phase or in the elimination of one large, pivotal player, i.e., Primestar, because it was a cable-owned satellite entity.
Another unique aspect comes from the fact that the merger impacts not just the MVPD side of the business, but also the newly-emerging broadband side. Furthermore, it’s composed of two companies that have been real visionaries and blazed their own set of trails, time and time again. To do something now that would stifle that innovation and competitiveness is a move surely worth considering. In addition, there is uniqueness in the fact that the merger proposes two platforms combining together that are not compatible. This will eventually require a change out of all or a majority of the set-top boxes and related hardware (whereas the purchase of one cable company by another is easier because set-top boxes don’t necessarily need to be changed out and it does not reduce competition in any given MVPD geographic market).
How Is The Market Defined?
For most people who truly know and understand the DBS industry in the United States today, the idea that Echostar and DirecTV compete any less against each other than they do against the cable industry is close to ludicrous. Common sense maintains that the reason for being of DirecTV and Echostar during the past few years of their existence has been the acquisition of new subscribers. A very large percentage of these subscribers have come from the ranks of cable, clearly, and the same will be the case in the years to come. Yet the link in the chain that so many are missing has to do with an understanding of the disgruntled cable customer–or the entirely new MVPD customer–once he or she decides to try out a new DBS provider. This is the point at which that potential DBS subscriber begins looking for the right DBS system, be it Echostar or DirecTV.
In fact, a look back through the years at the press and other public announcements from both DirecTV and Echostar indicates anecdote after anecdote showing how the two DBS challengers tried to best one another for the sometimes elusive new satellite TV subscriber. In meeting after meeting with executives from the various satellite companies during the past decade, mention after mention has been made of competitive concerns directed specifically at the other satellite company(ies).
That said, the question arises, did DBS get so competitive because it competed against cable? Or, did it get competitive because it competed against both cable and itself? The reason this question is so important is because if DBS is deemed to have competed effectively, then in light of the proposed merger, regulators, rivals and consumers may want to ask: Will DBS under one name continue to compete as effectively? If the answer is no, then the question becomes, what will be lost to the merger versus what will be won?
The Rural Dilemma
It is also very important for the new DirecTV by Echostar to downplay and minimize the negative effects on the rural audience if the merger goes through unscathed. As a result, claims have been made that rural pricing would be kept on a par with that of the rest of the country. The impact of the single satellite monopoly in video will also be felt on the broadband side, especially if Echostar ends up controlling each of the companies that now exist in the broadband space. The problem with these Echostar claims, however, is that they are no more than claims, and like most successful industrialists, Charlie Ergen has been known to change his mind when the pressures of business have required.
Another concern for rural consumers will be whether the new DirecTV by Echostar would maintain national prices on products and services beyond mere programming package prices. Items such as DBS-related home theatre and other ancillary products, as well as other forms of interactive, high definition or other special programming services could be priced inordinately higher for rural audiences, without violating the restrictions of a promise not to raise programming package prices.
In recent hearings and presentations on Capitol Hill, executives supporting the merger said that the percentage of U.S. homes passed by cable is in the “high nineties.” By establishing such a picture in regulators’ minds, the merger advocates will be able to minimize the ill affects from the reduction of competition in those rural areas. Yet common sense suggests that the actual millions of households passed by cable in the continental U.S. today is significantly closer to the low eighties. The number of potential rural households that will be faced with just one significant MVPD provider following the merger is at least 12 million and probably growing.
The rural United States is also where a couple of key U.S. small-to-mid-sized rural cable concerns have gone into bankruptcy, largely as a result of competition from DBS. This trend is likely to continue, especially as each DBS system offers more and better service, and analog cable finds itself unable to upgrade and is thus unable to compete. This suggests that the ranks of TV households passed by cable is likely to decline, while the ranks of rural TV households passed only by DBS providers is likely to increase. In fact, one might expect the numbers of “rural” households not passed by cable to expand beyond the generally accepted 12 million number, as these analog systems continue to wither and die.
Finally, there is a possibility that the rural customer will not be equally served not only because of price differentials, but also because of marketing differentials. The new Echostar will have less incentive to market to rural areas. This will be because Echostar’s marketing dollar will be much better spent by marketing to more densely populated urban and suburban regions, where there will be much more bang for the marketing buck. Because they are unlikely to receive equal marketing treatment, these rural citizens will be unlikely to also receive equal service and product treatment. Vitally important to rural America also is the fact that by removing these two rivals and the marketing they create, hundreds of millions of dollars annually will not be spent on newspaper, TV, radio and salespeople, meaning many fewer jobs and much less revenue for rural America.
Satellite vs. Cable and DSL
It is interesting to note that neither Echostar nor DirecTV own any cable systems, and both service providers have consistently fought almost every form of cable wired service. This fact helps return the typical observer to the core idea: Because DBS has been so different–and better–most of the time, it has been able to compete more effectively against cable than if it had been the same type of delivery system.
Satellite today and more so tomorrow might be better for consumers than cable or other MVPD providers. Yet at the rate it’s going, taking more and more market share from cable yearly, satellite could well end up with 40 million subscribers and as much as 40 percent to 50 percent of the MVPD universe. To allow one single provider today to control that market tomorrow may well turn the competitive tides too much against the consumer to ever bring them back.
The Framers’ Intent
In addition, it is highly unlikely that the framers of the U.S. DBS scheme ever envisioned a realm where one DBS provider would control and profit from all of the “full-Conus” orbital slots. In fact, early rules forbade the control of more than one “full-Conus” slot by more than one entity. The early framers awarded and managed the slots in just such a manner when they granted them in the first place.
Yet instead, the Federal Communications Commissions (FCC) saw the value of assigning the other orbital slots to rival players. Most would say based upon the best intentions of those original framers, that seven years after DBS began, having one entity owning and controlling all three full-Conus slots and transponders, is an odd (and unexpected) result, at best.
Retailers, Programmers And The Doj Chime In
For DBS programmers, most, like the retailers as a whole, are reticent to speak out and take positions about the proposed merger. This is because they possibly fear alienating what may soon be the sole player in today’s market of almost 20 million subscribers. Yet “off the record,” there is significant concern from the programmers that the single bargaining power of one DBS system operator will take choices away from them, as well. The fear then is the lack of choice at the bargaining table will lead to lower fees for valuable programming. This, in turn, is expected to lead to less seed money for new programs.
On the retailer side, having just a single DBS set-top box entity behind U.S. DBS hardware causes concerns of concentration, such that retail profits will become narrower. If one were looking at an example of the competitive system at work, the success of Echostar’s retail sales in the small satellite retailer side of the business could well be the paradigm.
Finally, can the merger be approved on the basis of some major alterations or concessions? This is a long and complicated question. However, suffice it to say that national pricing guarantees and giving up or sharing orbital slots or infrastructure to or with potential competitors are not the kind of changes that will sit well with either Echostar or the Justice Department (DOJ). In the past, as seen in the Primestar deal, the DOJ has made it clear that it does not prefer the role of a “policeman,” which is one it has to take when it sets conditions to approved deals.
Many in today’s DBS industry have been silenced by the dynamics surrounding this merger deal. Echostar has always kept a close rein on its executives’ statements, and now it appears to be doing the same with DirecTV’s execs. Many retailers who have worked with Echostar in the past are most cautious about challenging the company today, and thus the level of dialog one would expect with a deal like this is substantially muted. If Echostar ends up being the only system operator in the business, few other companies will want their executives to be labeled as an opposing force.
Another argument remains that the MVPD market needs more competition in order to best serve all consumers, vendors and others tied to the industries it represents. Competition got today’s MVPD and satellite industries to where they are in their respective histories.
For DBS, throughout all the seven years of its existence in the United States, the mantra has always been affordable choice. Binding Echostar and the last remaining player on the field will remove that competition and thus a healthy piece of affordable choice, no matter how you define the market.
In the end, the definition of the players and the market described above is also pivotal to any antitrust analysis. This is because, if regulators and courts define the pool as not including other DBS operators, then it is simple to make it a “cable vs. DBS” game that best serves the consumer, and thus allow the DirecTV/Echostar merger to proceed. In this game, DBS (even if it’s just one company), can and will present plenty of competition to the thousands of cable multiple system operators in the United States today. Conversely, if regulators decide that DBS operators should compete among themselves in order to best serve the public interest, then to take away one of its two competitors (such as DirecTV), means that the industry is automatically transformed from a duopoly to a monopoly. In that scenario, DBS has the danger of becoming an “entrenched monopoly,” something it has decried for years when it talks as an industry against the cable industry.
Can the U.S. DBS industry shrink to just one? The answer ultimately lies in the hands of Washington, DC-based regulators and legislators, which means it becomes a political answer as well as a practical answer.
Yet also in the end, Charlie Ergen and Echostar’s owners win no matter what. Even if the merger tumbles, to hold up DirecTV for a year or more, and to keep arch rival Rupert Murdoch from getting it during the 2001-2002 timeframe, is a great, low-loss gamble. Because even if Echostar has to pay out a $600 million cancellation fee and buy Panamsat for $5 billion, by engaging DirecTV and the deal for most of 2002’s remaining months, he has not only slowed rival DirecTV down, he has gotten into their books, and he has kept arch rival Rupert Murdoch away from his most-prized U.S. crown jewel. v
Jimmy Schaeffler is a subscription TV analyst at The Carmel Group (http://www.carmelgroup.com), a publisher, conference organizer and consultancy based in Carmel-by-the-Sea, CA, which publishes the monthly newsletter, DBS Investor . The company specializes in satellite services, as well as telecommunications, computers and the media. His e-mail address is firstname.lastname@example.org. His telephone number is (831) 643-2222.