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News Analysis: Did EchoStar foul DirecTV merger plan?

Oct 14, 2002  •  Post A Comment

The Federal Communications Commission’s decision to block the satellite TV merger between EchoStar and DirecTV had been expected for some time. In recent months, many analysts had been saying the deal, which would have given EchoStar sole ownership of the U.S. satellite TV business, was anti-competitive.
However, the FCC’s vote marked the first time since 1969 that the agency has opposed a corporate merger. And when the merger was announced last year, some legal experts were saying the federal government would approve it. In fact, governors of seven states endorsed the deal.
So what happened? Was the merger doomed from the start? Or is there someone to blame? We may never know for sure, but one thing is certain: EchoStar, which is led by the brilliant but hard-headed Charlie Ergen, has mismanaged, if not outright bungled, the merger campaign from day one. Mr. Ergen has frequently thumbed his nose at the very federal officials who have been reviewing the proposal. And he has allowed rival Rupert Murdoch to repeatedly outfox him with a well-orchestrated lobbying campaign.
EchoStar and General Motors Hughes, the parent of DirecTV, say they will continue to seek federal approval and will soon file a revised proposal with both the Justice Department and the FCC. But last week’s decision would seem to kill the deal once for and all. In retrospect, EchoStar’s failure can be traced to three critical mistakes:
Ignoring public relations
EchoStar failed to execute a sophisticated public relations effort to ease concerns that the merger would create a satellite TV monopoly. The concerns are legitimate; in many rural areas, where cable TV does not exist, the merger would leave viewers with just one multi-channel option. However, rather than ease fears, EchoStar seemed to go out of its way to reinforce them.
For instance, EchoStar threatened to drop ESPN’s Classic Sports Channel, the ABC Family Channel and 21 Fox TV stations unless they renegotiated more favorable licensing deals. The DBS service eventually came to terms, keeping the channels in place. But the action signaled that rural viewers could lose programming at any time if EchoStar were the nation’s sole satellite TV operator. That’s not the message EchoStar wanted to send while federal regulators were reviewing the merger.
The incident might have been forgotten if EchoStar had not continued to operate as a rogue company. The DBS service announced in March that it would likely eliminate all local TV stations unless the Supreme Court granted relief from a federal must-carry law. The threat, which was later dropped after the high court rejected EchoStar’s petition, further painted the company as arbitrary and impulsive.
EchoStar took another PR blow in late summer when telemarketers representing the company made a number of false claims to DirecTV customers, including that they needed to switch their service to EchoStar. The telemarketing effort, in which EchoStar denied official involvement, was so excessive that merger partner DirecTV was forced to publicly warn its customers, an embarrassment to both companies.
Underestimating Murdoch
Mr. Murdoch’s News Corp. was expected to buy DirecTV before EchoStar jumped in with a better offer. Mr. Murdoch, who has long dreamed of owning a satellite TV service in the United States, was infuriated by the turn of events. As soon as the EchoStar-DirecTV deal was announced, he began lobbying behind the scenes to kill it.
However, EchoStar seemed to think that Mr. Murdoch was finished after the merger was announced. The DBS company was slow to rally support in Washington and elsewhere, leaving Mr. Murdoch with an open field to run. Once EchoStar finally realized its error, Mr. Murdoch had already persuaded countless federal and state officials to publicly oppose the deal. Mr. Murdoch’s legal team widely distributed a 24-page document on Capitol Hill called “The Essential Guide to the EchoStar/DirecTV Deal.” The paper included several articles criticizing the merger and letters of protest from state attorneys general and the National Association of Broadcasters.
EchoStar has not understood that many federal officials have an inflated opinion of themselves; they expect to be stroked, praised and catered to. When they are, they are more likely to approve a bill or merger that may have legal shortcomings. When they are not, they usually offer the back of their hands. (Just ask Microsoft.)
But EchoStar frequently defied the will of federal officials who were reviewing the deal. For instance, last spring, EchoStar failed to meet the FCC’s deadline for submitting documents related to the merger. (The FCC temporarily halted review of the merger until the documents were submitted.)
Perhaps the final straw came when the FCC had to order EchoStar to terminate a plan that would require its customers to get two dishes to receive local channels. Considering that EchoStar desperately needed the FCC’s good will, the company’s cause certainly wasn’t helped when the agency had to publicly admonish it.
EchoStar says politics had nothing to do with the FCC’s decision. The company has maintained that federal officials would decide solely on the proposal’s merits. That is, however, a naive view of the way Washington works.
Now EchoStar faces a future in which it might have to pay General Motors Hughes a $600 million breakup fee, buy PanAmSat for $2.7 billion, far more than it’s worth (a GM condition of the deal), and possibly watch archrival News Corp. buy DirecTV.
Despite the looming bills, the Murdoch scenario is what scares Mr. Ergen most. News Corp., which owns everything from 20th Century Fox studios to the Fox TV network, could turn DirecTV and its 11 million-customer base into a satellite TV juggernaut.
And where would that leave EchoStar? Mr. Ergen has suggested that his company could eventually go out of business if the merger is defeated.
Could all of this have been avoided if EchoStar had handled the merger review more delicately? That’s a question that will be asked by industry officials-including, perhaps, Charlie Ergen himself-for years to come.