TechKnowledge No. 28

The EchoStar-DirecTV Merger: Antitrust Folly Reaches Outer Space

By Clyde Wayne Crews Jr. and Adam D. Thierer
December 5, 2001

The recently proposed marriage of satellite television providers EchoStar Communications and DirecTV (owned by Hughes Electronics) has raised the possibility of antitrust intervention by federal regulators. Objections to the deal stem from a presumably straightforward concern: If the top two competitors in the satellite TV marketplace are allowed to merge, it will eliminate any vestiges of competition in that sector. But, as is often the case, things aren’t really that simple.

As private enterprises, the companies should have the right to organize as they see fit without seeking permission. But antitrust law places concern for “protecting competition” ahead of the principle of private property-which is the basis for competition in the first place. Even on traditional antitrust grounds, perspective is needed: Although an EchoStar/DirecTV combination may “dominate” its sector (to borrow the hand-wringing stance of antitrust orthodoxy), such a merger could in fact herald unprecedented competition to cable, broadcast, and even telephone services potentially. Besides, the number of subscribers the combination would serve (estimated at 17 million) isn’t particularly alarming when compared with America’s 104 million households, its 68 million cable subscribers, and an over-the-air broadcast infrastructure that reaches almost everyone.

In an environment in which the public has yet to embrace broadband Internet services and interactive television remains an unfulfilled promise, satellite may yet break though where cable and DSL have not. Thus policymakers can cause considerable damage when interfering with network industries’ efforts to orient themselves to suit customers’ needs. Satellite company mergers are just one element of an evolving marketplace that will increasingly put consumers in direct control of their viewing experiences. TiVo and ReplayTV, for example, are building their recording technologies into satellite and cable set-top boxes. Such innovations magnify consumer choice and allow the user to serve as programmer and scheduler. No longer do three major TV networks dictate prime time.

But it will take vast resources to build the broadband networks of tomorrow, and mergers on an unprecedented scale will be part of the market processes required to make it happen. Although it may be asking too much to expect a large crop of small Mom-and-Pop competitors to jump in and roll out massive networks, it is true that what seems “dominant” today often gets superceded by newcomers. As the Wall Street Journal put it, AOL acquired Time Warner when it wasn’t even old enough to buy beer. Change and evolution are certain. Antitrust, on the other hand, institutionalizes market stagnation.

Policymakers thwart the natural progression of markets by placing antitrust regulatory hurdles in the way of companies that seek the economies of scale necessary to offer ubiquitous communications network services. Competitors would be powerless to stop market-driven deals from going forward were it not for the institutionalized governmental manipulation of free markets known as antitrust. The regulatory mentality that seeks to mold the communications marketplace to fit its own misguided vision will simply discourage investment in crucial new facilities-based networks.

Alarmingly, regulators are using the merger review process to extract a parade of concessions from merging communications firms. The quid pro quo is simple: If you want the feds’ antitrust blessing, you’d better play ball. You must offer service to areas were it might not be economical to do so, offer drastically reduced rates for that service that may keep you from recouping upfront investments, and subject yourself to an endless array of fines or penalties if you do not comply perfectly with those requirements. Such regulatory blackmail has been employed in mergers between Verizon-NYNEX-GTE, SBC-Ameritech, AOL-Time Warner, MCI-Sprint, and others.

Regulators tend to be least tolerant of mergers between direct competitors. Blocking such horizontal mergers, even between rivals like DirecTV and EchoStar, has a dramatic downside. As the communications sector grows, the opportunities thwarted by intervention accumulate. For example, the Department of Justice, in an ill-advised spasm of enforcement, blocked a merger between long-distance competitors WorldCom and Sprint. Yet in the reasonably near future, the Bell companies will likely enter the long-distance business, and a combined WorldCom-Sprint might have been a formidable rival. Now, the low valuation of WorldCom since rejection of the merger could result in the takeover of that company by a Baby Bell. Thanks to antitrust, instead of seeing a viable Bell rival emerge in long distance and data services, we may see WorldCom absorbed by a Bell. Policy could hardly get more perverse.

Things needn’t be this way. The media and Internet sectors provide ample ground for rethinking merger policy. In today’s shaky economy, debts, overcapacity, the dot-com collapse, price wars, and efforts to sustain growth create an urge to merge that should be allowed to play out, as resources are reallocated. Just as antitrust policy shouldn’t block the EchoStar/DirecTV merger, it must also stand clear of healthy market responses to the merger. The Echostar/DirecTV combination will face discipline from programmers, consumers, already-poised rivals, new entrants, and innovations such as improved Internet video over fiber.

Meanwhile, all artificial barriers to a competitive telecommunications and information marketplace should be removed. For example, Federal Communications Commission chairman Michael Powell, the courts, and some in Congress are skeptical of restrictions barring ownership of both TV stations and newspapers in the same market, as well as of cable/broadcast cross-ownership bans. Also under scrutiny is a 1996 rule limiting market share of broadcasters’ and cable firms’ national market share to 35 percent. And in addition to Department of Justice or Federal Trade Commission review or mergers, the FCC has merger review authority based on its role in approving broadcasting license transfers. Such paralysis by analysis should be eliminated. Ending this lineup of restrictions would enable a flexible marketplace poised to respond to any competitive eventuality. Finally, on the satellite front, the real barrier to entry problem is being caused not by companies, but by global bureaucrats and regulatory organizations that assign orbital slots over the Earth. If policymakers want to encourage more competition on the ground, they need to find ways to make it easier for companies to launch more satellites into space.

There are no grounds for worry that big telecom interests will monopolize information in a free society. The bandwidth cornucopia represented by wireless airwaves and fiber breakthroughs is barely tapped, and the peer-to-peer computing revolution promises to make a broadcaster out of everyone. The worry over media monopoly seems especially misplaced given that most programming consists of entertainment and fantasy-hardly the necessities of life. But antitrust law is busy engaging in a fantasy of its own, that of imagining itself an improvement over free markets.

Clyde Wayne Crews Jr. (wcrews [at] cato [dot] org) is director of technology studies, and Adam Thierer (athierer [at] cato [dot] org) is director of telecommunications studies at the Cato Institute in Washington. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.