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FCC Grounds Satellite TV Merger Deal

WASHINGTON -- The Federal Communications Commission grounded the proposed $17 billion merger between satellite television providers EchoStar Communications and Hughes Electronics Wednesday night with a unanimous 4-0 rejection of the deal. The FCC said that the companies did not demonstrate that the merger would serve the public interest.

Last year, General Motors proposed spinning off its Germantown, Md.-based Hughes Electronics division, which owns and operates direct broadcast satellite (DBS) company DirecTV, and merging it with Littleton, Colo.-based Echostar , which operates the DISH satellite system. At the time of the deal, it was valued at $26 billion.

The proposed merger would have created the second-largest pay television platform in the nation with more than 16.7 million subscribers and control of between 80-90 percent of the DBS market. Critics of the deal, which included spurned Hughes suitor News Corp., said the merger would create a satellite television monopoly by combing the nation's number one and two DBS operators.

Both Echostar and Hughes contended the promise of offering broadband and advanced digital media services to underserved rural markets, at potentially lower costs, would have presented serious competition to cable and regional bell companies' ambitions to offer broadband and digital media entertainment to their subscribers, arguments rejected by the FCC.

"The combination of EchoStar and DirecTV would have us replace a vibrant competitive market with a regulated monopoly," FCC Chairman Michael Powell said at a Thursday morning press conference. "The case against approving the (deal) 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."

The FCC ruled the combination of EchoStar and Hughes would eliminate existing facilities-based intramodal competition and replace it with a proposed "national pricing" plan, which would have to be enforced by regulatory authorities.

"Under this plan, EchoStar and Hughes would have us replace healthy competition with a monopoly governed by a scheme of regulated pricing," Powell said. "The Communications Act and the Commission's overall policy goals aim at replacing regulated monopoly service providers with free market competition among multiple service providers."

Powell added that, "If economic history has taught us anything, it is that healthy competitive markets, not regulated monopolies, maximize consumer welfare."

EchoStar and Hughes built their merger application on three basic premises:

  1. the two companies only compete with cable and not each other;
  2. standing alone, they are weak competitors to cable;
  3. and absent the merger, they could not provide "local into local" broadcast services.

Again, the FCC rejected all three contentions, saying the facts undermined the claims.

"First, the record shows that EchoStar and DirecTV compete vigorously, not only with cable, but with each other," Powell said. "Second, neither operator is failing in its efforts to compete against cable. DBS subscriber rates are 2.5 times larger than those of cable."

Finally, Powell said, "the record shows that each company standing alone will be capable of offering local broadcast stations to 80-85 percent of American homes in a very short time."

The proposed merger is still under consideration by the Dept. of Justice and, under FCC regulations, the two companies can revise the terms of the merger or submit a new application to the FCC.