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EchoStar deal to impact demand, price

Nov 5, 2001  •  Post A Comment

The proposed merger of the two dominant domestic satellite services and the consequent shutout of Rupert Murdoch’s Sky Global from the lucrative U.S. market will impact the price of and demand for content.
Analysts are predicting everything from a price war that could be initiated by EchoStar Communications’ tough-negotiating Chairman Charlie Ergen to cable operators’ scramble to secure satellite’s exclusive program rights.
Last week, the man who will command the combined entity of 16.7 million homes vowed to eliminate the 10 percent to 15 percent premium satellite providers generally pay for programming over their cable counterparts.
“We believe on a level playing field we can reduce those programming costs and pass those savings on to consumers in the form of lower prices,” Mr. Ergen told investors last week. “It’s a shame after seven years in the [direct broadcast satellite] business, we have not been able to stop the two- and three-times-greater-than-inflation price increases in the cable industry.”
But analysts said he will push the envelope on other programming fronts.
“Charlie Ergen is a very difficult businessperson-and kudos to him,” ABN AMRO analyst John Martin told me. “He’s very frugal and shrewd, and I think he’s going to make everybody’s life miserable when and if he gets bigger. He’s going to put a real squeeze on the programmers. And I think he’s really going to put a squeeze on cable.”
Ripple effect
Mr. Martin and others said there will be a significant ripple effect in program access and costs among content producers and distributors, who already are traumatized by a recessionary advertising market and industry consolidation.
Richard Bilotti, analyst at Morgan Stanley Dean Witter, said cable operators will use against the satellite companies the latter’s argument that the merger is necessary to make them more effective competitors to cable. Cable operators will seek the same premium and sports programming that satellite now enjoys when current protections sunset next October. If that is granted by the Federal Communications Commission, price of and demand for popular nonadvertising-based content would likely rise.
On the flip side, the concentration of power among cable and satellite providers “could limit cable programmers’ ability to institute significant increases in monthly affiliate fees,” such as those that recently occurred at USA Networks, Mr. Bilotti said.
Mr. Ergen’s argument for parity with cable could prove to be a double-edged sword: He can use it to fend off the antitrust opposition in Washington but have it used against him when trying to negotiate lower program license fees in Hollywood. The ultimate irony is that EchoStar-DirecTV will have to cut content deals with Fox, the largest producer of prime-time television shows, with 24 series currently on all the broadcast networks.
“You’ve got some very formidable network owners like Disney and AOL Time Warner and Viacom and News Corp. that aren’t just going to roll over,” Mr. Martin said.
For now, digital video is the only playing field on which a combined EchoStar and DirecTV can continue to wage the war for consumers, with satellite high-speed Internet services at least 18 months away. Some analysts said even competing with digital cable’s video-on-demand will be a challenge, since personal video recorders built into satellite set-top boxes must be backed by adequate storage to downstream movies and TV shows.
An opening for cable
“Cable operators may have a short-term advantage: They can capitalize on the immediate lack of focus by the satellite companies and lock in program license fees. But this is all about the swinging pendulum between distribution and content,” Mr. Martin said.
“It will cause the cable operators to get bigger. It will cause content companies such as Vivendi Universal that don’t have formidable distribution in the United States to seek an equity alliance that will give them some influence or say in the distribution of their product with cable operators like Fox or Charter or with existing broadcast networks like NBC,” he said.
A more potent combined EchoStar-DirecTV comes onto the scene at a time when the delicate dance between content and distribution players has been turned inside out by strained television economics and mixed signals. Sony Corp. of America is getting out of broadcast network production at a time when Vivendi Universal is fighting its way in. Although continued industry consolidation tightens distribution capacity, it heightens demand for product, which at least theoretically should push up prices.