The EchoStar‐​DirecTV Merger: Antitrust Folly Reaches Outer Space

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The recently proposed marriage of satellite television providers EchoStarCommunications and DirecTV (owned by Hughes Electronics)has raised the possibility of antitrust intervention by federalregulators. Objections to the deal stem from a presumably straightforwardconcern: If the top two competitors in the satellite TV marketplaceare allowed to merge, it will eliminate any vestiges of competitionin that sector. But, as is often the case, things aren't reallythat simple.

As private enterprises, the companies should have the right toorganize as they see fit without seeking permission. But antitrustlaw places concern for "protecting competition" ahead of theprinciple of private property-which is the basis for competition inthe first place. Even on traditional antitrust grounds, perspectiveis needed: Although an EchoStar/DirecTV combination may "dominate"its sector (to borrow the hand-wringing stance of antitrustorthodoxy), such a merger could in fact herald unprecedentedcompetition to cable, broadcast, and even telephone servicespotentially. Besides, the number of subscribers the combinationwould serve (estimated at 17 million) isn't particularly alarmingwhen compared with America's 104 million households, its 68 millioncable subscribers, and an over-the-air broadcast infrastructurethat reaches almost everyone.

In an environment in which the public has yet to embracebroadband Internet services and interactive television remains anunfulfilled promise, satellite may yet break though where cable andDSL have not. Thus policymakers can cause considerable damage wheninterfering with network industries' efforts to orient themselvesto suit customers' needs. Satellite company mergers are just oneelement of an evolving marketplace that will increasingly putconsumers in direct control of their viewing experiences. TiVo and ReplayTV, for example, are buildingtheir recording technologies into satellite and cable set-topboxes. Such innovations magnify consumer choice and allow the userto serve as programmer and scheduler. No longer do three major TVnetworks dictate prime time.

But it will take vast resources to build the broadband networksof tomorrow, and mergers on an unprecedented scale will be part ofthe market processes required to make it happen. Although it may beasking too much to expect a large crop of small Mom-and-Popcompetitors to jump in and roll out massive networks, it is truethat what seems "dominant" today often gets superceded bynewcomers. As the Wall Street Journal put it, AOL acquiredTime Warner when it wasn't even old enough to buy beer. Change andevolution are certain. Antitrust, on the other hand,institutionalizes market stagnation.

Policymakers thwart the natural progression of markets byplacing antitrust regulatory hurdles in the way of companies thatseek the economies of scale necessary to offer ubiquitouscommunications network services. Competitors would be powerless tostop market-driven deals from going forward were it not for theinstitutionalized governmental manipulation of free markets knownas antitrust. The regulatory mentality that seeks to mold thecommunications marketplace to fit its own misguided vision willsimply discourage investment in crucial new facilities-basednetworks.

Alarmingly, regulators are using the merger review process toextract a parade of concessions from merging communications firms.The quid pro quo is simple: If you want the feds' antitrustblessing, you'd better play ball. You must offer service to areaswere it might not be economical to do so, offer drastically reducedrates for that service that may keep you from recouping upfrontinvestments, and subject yourself to an endless array of fines orpenalties if you do not comply perfectly with those requirements.Such regulatory blackmail has been employed in mergers betweenVerizon-NYNEX-GTE, SBC-Ameritech, AOL-Time Warner, MCI-Sprint, andothers.

Regulators tend to be least tolerant of mergers between directcompetitors. Blocking such horizontal mergers, even between rivalslike DirecTV and EchoStar, has a dramatic downside. As thecommunications sector grows, the opportunities thwarted byintervention accumulate. For example, the Department of Justice, inan ill-advised spasm ofenforcement, blocked a merger between long-distance competitorsWorldCom and Sprint. Yet in the reasonably near future, the Bellcompanies will likely enter the long-distance business, and acombined WorldCom-Sprint might have been a formidable rival. Now,the low valuation of WorldCom since rejection of the merger couldresult in the takeoverof that company by a Baby Bell. Thanks to antitrust, instead ofseeing a viable Bell rival emerge in long distance and dataservices, we may see WorldCom absorbed by a Bell. Policy couldhardly get more perverse.

Things needn't be this way. The media and Internet sectorsprovide ample ground for rethinking merger policy. In today's shakyeconomy, debts, overcapacity, the dot-com collapse, price wars, andefforts to sustain growth create an urge to merge that should beallowed to play out, as resources are reallocated. Just asantitrust policy shouldn't block the EchoStar/DirecTV merger, itmust also stand clear of healthy market responses to the merger.The Echostar/DirecTV combination will face discipline fromprogrammers, consumers, already-poised rivals, new entrants, andinnovations such as improved Internet video over fiber.

Meanwhile, all artificialbarriers to a competitive telecommunications and informationmarketplace should be removed. For example, FederalCommunications Commission chairman Michael Powell, the courts, andsome in Congress are skeptical of restrictions barring ownership ofboth TV stations and newspapers in the same market, as well as ofcable/broadcast cross-ownership bans. Also under scrutiny is a 1996rule limiting market share of broadcasters' and cable firms'national market share to 35 percent. And in addition to Departmentof Justice or Federal Trade Commission review or mergers, the FCChas merger review authority based on its role in approvingbroadcasting license transfers. Such paralysis by analysis shouldbe eliminated. Ending this lineup of restrictions would enable aflexible marketplace poised to respond to any competitiveeventuality. Finally, on the satellite front, the real barrier toentry problem is being caused not by companies, but by globalbureaucrats and regulatory organizations that assign orbital slotsover the Earth. If policymakers want to encourage more competitionon the ground, they need to find ways to make it easier forcompanies to launch more satellites into space.

There are no grounds for worry that big telecom interests willmonopolize information in a free society. The bandwidthcornucopia represented by wireless airwaves and fiberbreakthroughs is barely tapped, and the peer-to-peer computingrevolution promises to make a broadcaster out of everyone. Theworry over media monopoly seems especially misplaced given thatmost programming consists of entertainment and fantasy-hardly thenecessities of life. But antitrust law is busy engaging in afantasy of its own, that of imagining itself an improvement overfree markets.