The Justice Department filed suit yesterday to block the proposed $20 billion merger of satellite television rivals EchoStar Communications Corp. and Hughes Electronics Corp., saying the deal would create a monopoly that would eliminate competition for subscription television services in many rural areas.
"This merger would give EchoStar control of the skies," Charles A. James, assistant attorney general in charge of the agency's antitrust division, said in a statement. Not only would it leave consumers who depend on satellite television with only one choice, "it would leave tens of millions of households -- for whom DirecTV, Dish Network and cable now compete to provide multichannel video programming distribution service -- with a reduction from three to two competitive choices," he said.
In October 2001, EchoStar, which owns Dish Network, with 7.5 million customers, proposed an acquisition of Hughes's DirecTV, the nation's leading home satellite provider, with 10 million customers. Hughes is a subsidiary of General Motors Corp., which sought to unload the satellite system. EchoStar chief executive Charles W. Ergen, who designed the deal, said a merged company would provide more robust competition to the cable industry.
The Justice Department's suit in U.S. District Court in Washington follows the Federal Communications Commission's decision last month to reject the merger, forcing the company to modify the deal in hopes of winning approval.
The changes failed to win over the Justice Department. Nor did it assuage 23 state attorneys general, led by Jay Nixon of Missouri, an opponent of the merger, who filed their own suit to block the deal yesterday. The deal faced stiff opposition from some rural states where much of the population has no access to cable and consumers would go from a choice between two satellite companies to just one.
"When there is an absence of competition, consumers could have fewer programming choices and pay more -- for satellite service, for equipment and for installation," Nixon said. "We are asking the court to halt this merger so consumers are not harmed."
EchoStar offered a revised version of the merger that would effectively create a new competitor, Cablevision Systems Corp. The new proposal worked like this: EchoStar would sell and lease some of its spectrum and satellite capacity to Cablevision to help Cablevision become a viable satellite television rival to the merged EchoStar-Hughes. EchoStar hoped that the creation of a competitor would alleviate the Justice Department's antitrust concerns.
It did not.
The department said in a statement that it "considered a very recent proposal by the merging parties to restructure the transaction in an attempt to remedy the anticompetitive problems inherent in the merger" and concluded that "even if the proposed concept could be realized, it was unlikely to become a sufficient replacement for the vigorous competition that now exists between Hughes and EchoStar within a reasonable period of time."
From EchoStar's Littleton, Colo., headquarters, Ergen said in a statement he still believe the merger represented the best way to compete against the cable industry.
"We are obviously disappointed that at this time we have not been able to convince regulatory officials to share our vision," he said. "EchoStar will continue to explore all possible means to be allowed to compete against the cable giants and for more choice for all consumers."
Those options could include EchoStar walking away from the deal, in which case Ergen's company could be responsible for a $600 million breakup fee. Or, if it's clear to both parties that the deal has no chance of happening by Jan. 21, the date set to complete the merger, both sides may walk away. Or, Ergen could file a lawsuit asking the U.S. District Court to expedite review of the merger and make its own appraisal of the deal, hoping that the court would overturn Justice's ruling.
EchoStar would not comment on its plans.
Hughes issued a statement saying it would "consult with EchoStar to jointly determine our next steps."
Last year, Hughes spurned a purchase offer from Rupert Murdoch's News Corp. in favor of EchoStar's bid. If the proposed deal between EchoStar and Hughes ultimately falls through, News Corp. may make another bid for Hughes, which would add to Murdoch's global satellite empire. He probably would not face the same regulatory and antitrust opposition as Ergen because News Corp. owns no rival satellite companies in the United States.
Yesterday, the General Accounting Office released its own study of the merger, saying neither company has the technological capability to offer local television channels as well as cable-competitive premium services to all 210 national television markets without the merger.
"The consumer is left between a rock and a hard place," said Gene Kimmelman, co-director of Consumers Union, which publishers Consumer Reports magazine. "This action may address the severe problems that arise with merger in rural America, but by blocking the merger and refusing to do surgery on it, the Bush administration has left cable consumers beholden to monopolies that keep raising prices at three times the rate of inflation, controlling programming and high-speed Internet service with no sign of new competition."
Cablevision is planning on going ahead with its own satellite system, regardless of whether it gets a piece of EchoStar's spectrum. It plans to launch a satellite in March.
"Cablevision continues to believe that the restructured merger with the divestiture of spectrum and assets provides a unique opportunity to ensure a programming and technology-driven, competitive future for the satellite industry," the company said in a statement.