TechKnowledge No. 41

EchoStar-DirecTV Merger Critics Propose Infrastructure Socialism in Outer Space

By Adam D. Thierer and Clyde Wayne Crews Jr.
October 8, 2002

It is becoming an all-too common feature of modern high-tech regulatory policy: If you feel you don’t have the infrastructure necessary to compete against a rival, just petition regulators for access to your competitor’s networks and technologies instead of building your own. The latest example of such infrastructure socialism comes from the field of direct broadcast satellite (DBS) where the two largest competitors in the industry, EchoStar Communications and DirecTV (owned by Hughes Electronics) have proposed to merge their systems into a single satellite constellation to serve American consumers.

Not surprisingly, smaller satellite rivals and many others are eager to sabotage the proposed marriage in any way possible. Most notably, SES Americom, a competing global satellite operator, has made a filing to the Federal Communications Commission and Department of Justice that is very important because it embodies a philosophy and set of merger conditions that may foreshadow any final merger deal EchoStar cuts with the government, assuming the merger isn’t blocked outright.

SES Americom’s filing is laced with apocalyptic rhetoric warning of the “last-mile bottleneck” control that the new EchoStar entity will hold over satellite access to the home. SES warns that consumers will apparently not be willing to replace existing satellite dishes and set-top boxes with rival systems, or that EchoStar will utilize a combination of proprietary standards and exclusive business arrangements with retail distributors of satellite services or hardware to protect their “natural monopoly.” Not surprisingly, that leads SES to advocate for a long list of “open access” conditions that regulators have already employed in other merger cases, such as AOL-Time Warner and certain Baby Bell mergers. SES demands “open standards,” an “open platform,” and “non-discriminatory access” to EchoStar’s equipment at “reasonable, cost-based, wholesale rates.”

Call it Marxism for the Information Age: What’s yours is mine, and if you’re not willing to share it, the State will expropriate it for communal use and toss you a few pennies for your investment. Such a regulatory ethos is wholly corrupt and completely at odds with foundations of a free and just capitalist system. Sadly, however, morality-based arguments don’t get very far in Washington these days. We can only hope that policymakers will at least take into account the economic downside of infrastructure sharing.

Mandatory sharing should not be mistaken for real competition, as it is all too often in the study of economic regulation today. The zero-sum mentality that drives the open-access crusade posits that once a network has been built and used by a large enough group of consumers, it is the only facility we can expect to provide service in the future. Somehow, a company and its shareholders made the expensive investments necessary to provide an innovative new network service once, but we can apparently never again expect that feat to be repeated. Isn’t this selling our innovative culture a little bit short?

Open access mandates overrule market processes by jettisoning the principles of private property and voluntary exchange, even though those principles form the bedrock on which future waves of network expansion and progress depend. The “essential provider” vision that the open access model both accepts and imposes should be rejected in favor of a new principle: competition in the creation of networks is as important as competition in the goods and services that get sold over new or existing networks.

All this is not to say that, at certain times, some firms may possess significant market power within a given industry sector, but such moments are fleeting as long as governments do not prop up market power artificially through entry and exit controls, price regulation, or restrictive licensing procedures. When things seem to be at their worst in a given market, entrepreneurs usually take notice and act. For example, while regulators have spent years fretting over how best to divvy up and share the old copper wireline telephone network already in the ground, along came a vibrantly competitive wireless cellular telephone industry that has already cannibalized much of the long-distance voice marketplace and is starting to do the same for traditional local service. A recent USA Today poll revealed that 18 percent of cell phone owners surveyed-almost one in five-consider their cell phones to be their “primary phone,” which led telecom analyst Jeff Kagan to predict that in 5 to 10 years, “the vast majority of us are going to be using wireless phones as our main phones.” And a recent study by IDC, a global technology industry analysis firm, projected that 20 million wireline access lines will be displaced by cellular services by 2005 as consumers continue to opt for wireless services over wireline options. An amazing 138 million people subscribe to cellular systems today, up from just 11 million a decade ago.

Needless to say, regulators never saw this coming. Although they can take some credit for at least auctioning off the additional spectrum that made this technological revolution possible, no one expected cell phones to become a credible substitute for the traditional wireline telephone system. But it happened, not through convoluted infrastructure-sharing mandates, but through the sizeable investments made by numerous firms in completely new facilities-based infrastructures.

Is it too much to expect the same to happen in the video marketplace? Is EchoStar-DirecTV the end of the story? Can we never again expect to see another company take a stab at competing in this market? Ironically enough, the answer to that question can be found in the SES filing since the firm notes that they are in the process of rolling out a new facilities-based satellite service called “Americom2Home” that will offer video and Internet access to Americans. Moreover, even SES acknowledges in its filing that the combined EchoStar-DirecTV entity would still only constitute 20 percent of the U.S. multi-channel video program marketplace. The other 80 percent is primarily held by cable giants who seem to be holding their own fairly well against their satellite rivals. So the new EchoStar will just big another fish in a big pond of competitors. And several other bold wireless schemes have been proposed in recent years. Northpoint Technology, for example, has fought a grueling multi-year battle to win the right to use the same spectrum as DBS companies but from the northern instead of the southern sky. Wireless telecom entrepreneur Craig McCaw has also been busy funneling billions into satellite ventures such as ICO and Teledesic. Those satellite constellations would offer ubiquitous high-speed service across the globe and have attracted an impressive group investors, including Microsoft founder Bill Gates. And let’s not forget about wi-fi and ultra-wideband, which could revolutionize the way we communicate.

The only legitimate concern that SES and other EchoStar-DirecTV opponents can point to is the convoluted and laboriously slow orbital assignment process that companies must go through to get permission to launch and operate a new spaced-based communications service. This can present a serious barrier to entry and deserves to be re-examined. Launching a satellite into space is a risky and expensive proposition to begin with, so regulators shouldn’t make it any harder. Sinking the EchoStar-DirecTV merger or demanding extreme open-access regulation isn’t going to solve that problem however.

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