EchoStar‐​DirecTV Merger Critics Propose Infrastructure Socialism in Outer Space

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It is becoming an all‐​too common feature of modern high‐​techregulatory policy: If you feel you don’t have the infrastructurenecessary to compete against a rival, just petition regulators foraccess to your competitor’s networks and technologies instead ofbuilding your own. The latest example of such infrastructuresocialism comes from the field of direct broadcast satellite (DBS)where the two largest competitors in the industry, EchoStarCommunications and DirecTV (owned by Hughes Electronics) haveproposed to merge their systems into a single satelliteconstellation to serve American consumers.

Not surprisingly, smaller satellite rivals and many others areeager to sabotage the proposed marriage in any way possible. Mostnotably, SES Americom, acompeting global satellite operator, has made a filing to theFederal Communications Commission and Department of Justice that isvery important because it embodies a philosophy and set of mergerconditions that may foreshadow any final merger deal EchoStar cutswith the government, assuming the merger isn’t blockedoutright.

SES Americom’s filing is laced with apocalyptic rhetoric warningof the “last‐​mile bottleneck” control that the new EchoStar entitywill hold over satellite access to the home. SES warns thatconsumers will apparently not be willing to replace existingsatellite dishes and set‐​top boxes with rival systems, or thatEchoStar will utilize a combination of proprietary standards andexclusive business arrangements with retail distributors ofsatellite 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 inother merger cases, such as AOL‐​Time Warner and certain Baby Bellmergers. 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 expropriateit for communal use and toss you a few pennies for your investment.Such a regulatory ethos is wholly corrupt and completely at oddswith foundations of a free and just capitalist system. Sadly,however, morality‐​based arguments don’t get very far in Washingtonthese days. We can only hope that policymakers will at least takeinto 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 positsthat once a network has been built and used by a large enough groupof consumers, it is the only facility we can expect to provideservice in the future. Somehow, a company and its shareholders madethe expensive investments necessary to provide an innovative newnetwork service once, but we can apparently never again expect thatfeat to be repeated. Isn’t this selling our innovative culture alittle bit short?

Open access mandates overrule market processes by jettisoningthe principles of private property and voluntary exchange, eventhough those principles form the bedrock on which future waves ofnetwork expansion and progress depend. The “essential provider“vision that the open access model both accepts and imposes shouldbe rejected in favor of a new principle: competition in thecreation of networks is as important as competition in the goodsand services that get sold over new or existing networks.

All this is not to say that, at certain times, some firms maypossess significant market power within a given industry sector,but such moments are fleeting as long as governments do not prop upmarket power artificially through entry and exit controls, priceregulation, or restrictive licensing procedures. When things seemto be at their worst in a given market, entrepreneurs usually takenotice and act. For example, while regulators have spent yearsfretting over how best to divvy up and share the old copperwireline telephone network already in the ground, along came avibrantly competitive wireless cellular telephone industry that hasalready cannibalized much of the long‐​distance voice marketplaceand is starting to do the same for traditional local service. ArecentUSA Today poll revealed that 18 percent of cell phoneowners surveyed‐​almost one in five‐​consider their cell phones to betheir “primary phone,” which led telecom analyst Jeff Kagan topredict that in 5 to 10 years, “the vast majority of us are goingto be using wireless phones as our main phones.” And a recentstudy by IDC, a global technology industry analysis firm,projected that 20 million wireline access lines will be displacedby cellular services by 2005 as consumers continue to opt forwireless services over wireline options. An amazing 138 millionpeople subscribe to cellular systems today, up from just 11 milliona decade ago.

Needless to say, regulators never saw this coming. Although theycan take some credit for at least auctioning off the additionalspectrum that made this technological revolution possible, no oneexpected cell phones to become a credible substitute for thetraditional wireline telephone system. But it happened, not throughconvoluted infrastructure‐​sharing mandates, but through thesizeable investments made by numerous firms in completely newfacilities‐​based infrastructures.

Is it too much to expect the same to happen in the videomarketplace? Is EchoStar‐​DirecTV the end of the story? Can we neveragain expect to see another company take a stab at competing inthis market? Ironically enough, the answer to that question can befound in the SES filing since the firm notes that they are in theprocess of rolling out a new facilities‐​based satellite servicecalled “Americom2Home” that will offer video and Internet access toAmericans. Moreover, even SES acknowledges in its filing that thecombined EchoStar‐​DirecTV entity would still only constitute 20percent of the U.S. multi‐​channel video program marketplace. Theother 80 percent is primarily held by cable giants who seem to beholding their own fairly well against their satellite rivals. Sothe new EchoStar will just big another fish in a big pond ofcompetitors. And several other bold wireless schemes have beenproposed in recent years. Northpoint Technology,for example, has fought a grueling multi‐​year battle to win theright to use the same spectrum as DBS companies but from thenorthern instead of the southern sky. Wireless telecom entrepreneurCraig McCaw has also been busy funneling billions into satelliteventures such as ICO and Teledesic. Those satelliteconstellations would offer ubiquitous high‐​speed service across theglobe and have attracted an impressive group investors, includingMicrosoft founder Bill Gates. And let’s not forget about wi‐​fi andultra‐​wideband,which could revolutionize the way we communicate.

The only legitimate concern that SES and other EchoStar‐​DirecTVopponents can point to is the convoluted and laboriously sloworbital assignment process that companies must go through to getpermission to launch and operate a new spaced‐​based communicationsservice. This can present a serious barrier to entry and deservesto be re‐​examined. Launching a satellite into space is a risky andexpensive proposition to begin with, so regulators shouldn’t makeit any harder. Sinking the EchoStar‐​DirecTV merger or demandingextreme open‐​access regulation isn’t going to solve that problemhowever.