TCS Daily

Tasty Dish

By James K. Glassman - January 9, 2002 12:00 AM

"Will consumers be better off?" is the question posed to Charlie Ergen, chairman and CEO of EchoStar Communications Corp. regarding the proposed $25.8 billion merger of his Dish Network satellite system with Hughes Electronic Corp. His answer to Tech Central Station Host James Glassman is a clear, "Yes." His reasons? It will lower costs, give consumers more of what they want and generate competition in the broad multichannel television distribution and broadband markets.

Glassman: You were on the griddle in front of Congress recently, and there seemed to be kind of a role reversal going on. Many liberals think your proposed merger is good for consumers. Many free market Republicans seemed to be concerned about consolidation. What was going on there?

Ergen: You know, I'm not an expert on Congress, and I'm no more of an expert after going through hearings than I was before. So, maybe we haven't done as good a job as we need to do to articulate our message to certain individuals. But we are willing to take the time to do that, and I'm personally willing to take the time to do that. We believe that the facts as they all come out, for which hearings are helpful but primarily through the regulatory process -- the Justice Department, the regulatory agency that will approve the anti-trust side of this, and the FCC, which will approve the public interest side of this. If the facts come out, I think it's clear that there are going to be two things that have to be addressed. One, is what market are we in? Many of the people in the congressional hearings that were opponents of ours tried to narrowly define our market to the satellite business only. And, clearly, if we're talking just about the satellite business, it's fair to call us a monopoly, but even some of our critics agreed in the hearings that we're in the broader paid television that includes cable.

Glassman: What's your share of that market?

Ergen: If you start with the definition by FCC and the Justice Department, which is the MVPD (multichannel video programming distributor) market -- a broad market that includes cable and satellite, all the paid television -- we are about 17 percent. EchoStar is, I guess, about 7 percent of that market. DirecTV is about 10 percent of that market, so, combined, we are about 17 percent of that market. The cable industry is about 80 percent. Their consolidation is even more than that. Many years ago, there might have been six or seven cable companies in Chicago. Today, there in one dominant provider that has 90 percent of the market in Chicago, so their market share can be quite a bit higher than the 80 percent in some markets.

Glassman: How quickly has your market share grown?

Ergen: Well, we started seven years ago with, you know, about two million, about 2 percent of the market, in the big dish business. Over the last seven years, we have grown to 17 percent. We continue to grow, but our growth has leveled off this year. Seven years ago when DBS (digital broadcast satellite) started, we were the only digital providers, but cable now has spent $50 billion over the last several years upgrading their plant equipment to digital and also adding broadband capability to their service. So, now we are in a situation where our market is expanding not just from the paid TV business, we also compete in the broadband market, and we are competing against $50 billion of upgrades to the infrastructure to the cable and transcable companies already in your home. So, we, as the satellite industry, have realized that we need to merge our resources together to, first of all, raise the capital necessary to compete against the cable companies, and second, to advance new technologies like broadband via satellite so we can compete on a basis of not just the video side, but also the broadband side.
But we have 17 percent of the MPVD market, and once you define that market, (for merger purposes) the second question is: are consumers going to be better off with the merger or not the merger?

Glassman: Right.

Ergen: It's more difficult to answer that question, but it's a simple question. And we know if customers are better off, here's why: Today, our customers ask us whether they're in rural America or the cities, for things that we can't deliver to them today. First of all, they're asking for local channels. Many people in cities like Richmond, Va., or Lexington, Ky. They only have one choice for their broadcast television, which is cable operated. They would like, of course, a satellite provider. But we need to provide the broadcast local channels. To do that, we have to merge our companies together to free up the spectrum that we duplicate today. We need to quit the duplication to make it more efficient to free up these additional 60 or 70 markets so we can do local-to-local so that folks in Kentucky or South Carolina or Montana can get local-to-local, and have a choice between cable and satellite, instead of just cable for the channels. The second thing people are asking for are more advanced services, such as high definition television, educational programming, interactive television, video on demand. These are all things that cable companies are starting to roll out, and they would like to see satellite be an option for them as well. We need the spectrum to be able to do that, too. And finally, people - particularly, in rural America, -- are asking that we get into high-speed Internet broadband. We're concerned in Montana that our son or daughter doesn't get the same educational opportunities as somebody in Boston because we don't have the high-speed Internet to help them with their school.

Glassman: Is that because of a lack of access there to cable or telephone broadband?

Ergen: We are concerned in small communities that we can't attract business or industry because we don't have the same kind of wireline access. We have this digital divide problem, and we have to combine our resources to be able to do high-speed broadband via satellite because the capital costs are in the billions of dollars. We need to spread those costs, and we need to raise the capital in the marketplace. The marketplace is looking for efficiency in productivity, which we can do in this merger. So, that's what the American public is screaming for.

Glassman: What about complaints that it will lead to higher prices?

Ergen: Nobody is calling up and saying Charlie, we want to pay more. So, I think we're sensitive to the fact that rural America may have in certain cases less choice in terms of a satellite provider, so that's why we said up front that we are willing to apply a nationwide pricing mechanism so that people in rural America will get these advanced services that they're asking for, but at the same not pay a higher price and get the advantage of the true competition in the cities. In Boston, for example, we have an over builder called RCN. We have a cable company. We have a satellite company with fierce competition. That low rate that is charged in Boston would be the same rate that would be charged across the country no matter where you live, so there are a lot of advantages for rural America without the penalty of potential price abuse on a single satellite company.

Glassman: Now, is that a concession that you are offering as a result of what politicians want you to do or some of these consumer groups say you need to do to get approval?

Ergen: I guess we are definitely sensitive to the consumer groups and the politicians. I mean we are certainly sensitive to that. But first of all nationwide pricing is something both companies do today. There is a practical aspect to it. It's the way we need to do it. For example, DISH network is the only true satellite provider in Alaska today, but somebody who lives in remote Alaska pays exactly the same price to us today for his or her programming as somebody in Atlanta, Ga. So we already do this nationwide pricing, because it is more convenient to have a nationwide method and because their billing system would need a lot of modification to be able to do it a different way. AOL/TimeWarner found out exactly the same thing in terms of charging nationwide pricing for Internet. It's something we are willing to agree to. I think that it may not be the only answer. Other people may have better ideas. I think the message that we are sending is that this merger is necessary, and we want to make sure that there are safeguards for those areas where people believe that the competition would be reduced, and so that's kind of one broad issue.

Glassman: What's the other?

Ergen: The second issue is going to be fundamental. When I say a customer is better off with this merger, the fundamental issue is going to be is it better to have -- where the cable industry has the dominant market share and has been raising the price at two or three times the rate of inflation -- in that environment is it better to have one strong satellite competitor where you can force those rates down and compete on a level-playing field with broadband, and digital, and video on demand that is high-definition television, or is it better to have two satellite companies who can compete effectively with cable, but you have two satellite companies who compete not only against the cable company, but against each other. In which case is the consumer better off? I think that's going to be a fundamental question here. I would contend, and I believe the facts will show, that we have to be on a level playing field to be an effective cable competitor; that the trends in the marketplace, the future after this big cable upgrade of $50 billion means that we had to get stronger. We need critical mass to get programming in discounts. We need critical mass to spread our fixed cost across a broader platform for broadband. We need capacity and spectrum sharing to do more local television to give people a real choice in those areas. These are all the things that the regulatory agencies will look at.

Congress hasn't really looked at those things yet. They haven't done studies to see the effect of the merger on the public and so forth. We're confident that when you look at the facts and you look at the studies, and you talk to real consumers about these issues, you know, that the merger will be allowed to proceed forward. Our company has made a six million dollar bet and General Motors has made a big bet based on looking at the facts that while there will be probably an arduous process certainly we'll receive our fair share of scrutiny as we should that this merger will be allowed to proceed forward in the best interest of consumers.

Glassman: I wanted to ask you just a few questions about broadband. Your satellites have the ability to provide a national broadband plant? Is that right?

Ergen: Yes. The challenge, the beauty of what we can do satellite is that we can in fact by combining our resources and technologies provide broadband access to all Americans, and there is no discrimination between a rural customer or somebody who lives in the city because our signal goes to every square inch of the United States. Obviously, the cable companies and the phone companies are not investing in rural broadband because economics doesn't justify it because of the lack of density in population. So satellite is really the only answer for many Americans. And since we're the only answer, we had to do the merger to be the answer.
The satellites, themselves, to be economical, have to be designed specifically for broadband purposes. So, they are quite a bit different than a video satellite that we have today. And, they are costly, and there is obviously technical risk in doing that. And, again, that is one of the prime focuses of the merger, to be able to do that. From a business perspective, competitive perspective, we believe our market is not just to be in the pay TV, but the broadband market. And, today, we do not have an effective product in the broadband market.

Glassman: In terms of speed or what?

Ergen: Yeah, in terms of speed, we don't have any broadband access for most of our customers. In Little Rock, Ark., for example, we don't have local-to-local, and broadband access. We know we can't compete against the cable operator who has local channels and broadband access, so we've got to do both. With this merger, we can do both. If we don't do that, the fact of the matter is the people in Little Rock Arkansas are not really going to have a choice of anything but cable, and then ultimately, the Congress is going to have to regulate cable again. So, I don't think anybody in the government wants to see that, so I think that's ultimately one of the reasons this merger will be approved.

Glassman: But specifically, you hope to have new generation of broadband services. Is that a question of speed or what?

Ergen: It's a question of speed. Today, one satellite could do maybe 200,000 users at a cost of maybe a thousand dollars for the equipment and about $70 a month, and we would still lose money on those kind of economics. We could build another generation of satellites that perhaps could do a million customers or more than a million customers on a satellite. We can cut the cost by 500 percent with a new generation of satellites. If we can cut the cost by 500 percent we can be competitive to what cable does today. But that costs money, and we are in a recession, and money is very tight. The market place is not lending money to fiber optic companies and satellite companies and Enron companies and all these new technologies. I mean the capital markets are looking for increased efficiencies. They are looking for increased productivity. They're looking for economies to scale. They are looking for critical mass. And unfortunately, we just don't have those today as individual satellite providers to do it, so we have got to go out and consolidate and become a larger company so we can compete and raise capital. It's a tough challenge, because the cable industry was able to raise $50 billion and upgrade their plant equipment. I'm proud as an industry that we forced cable to get better. If we hadn't existed, you might not see digital cable or broadband today. Unfortunately, we made them so strong that we don't really have a choice but to consolidate and get stronger ourselves.

Glassman: So, you think that if you are able to complete this merger that will make you more attractive to the capital market?

Ergen: Without question, because we have efficiencies of several billion dollars a year in cost savings. The biggest is we don't duplicate the spectrum. And when you don't duplicate the spectrum, you can add services and in that same spectrum. Let me give you a simple example. Imagine a factory that produces 100 cars a day, and there is another factory down the street that produces 100 cars a day. By combining our spectrum without any additional cost, we're' a factory that produces 200 cars a day. That 100 percent in efficiency is going to result in lower prices to consumers because we can lower our costs, and make us more competitive against the cable industry. At the same time, the capital markets will recognize the productivity increase, and therefore, lend you money. That's the way the economics works. Now, I have over simplified the way the macro economic world works, but that's essentially the way it happens. Now, the reverse of that is that the capital markets say, "Gee, you two guys are each making a 100 cars, and you have billions of dollars to do that. But this guy down the street, Mr. Cable Company here, he's making 200 cars a day already because he owns 100 percent of that pipe going by the house, and you guys are splitting that spectrum up 50-50 in outer space. Therefore, we only have $100 to lend people, so we're going to place that money on the cable guy because you guys just aren't as efficient. It is disappointing that it's so difficult to explain these pretty complex issues in a hearing, because it takes a thorough degree of understanding of economics and finance.

Glassman: Is that why you think the facts will better come out in regulatory hearings?

Ergen: Having said that, the Justice Department and the FCC, they clearly will ask for expert opinions from the fields of economics and finance, whereas you're just not going to necessarily see that in a congressional hearing. I think the hearing, went quite well despite the headlines. I think there were big questions. There were certainly concerns on people's parts, but there wasn't a lot of outright opposition. There was support from consumer groups, which was unusual. There was clear admission we're in the broader pay TV business, and many of the people who spoke out against the merger were business rivals, our competitors who want something they can't achieve in the market place today. That's a pretty common place in any merger. Typically, politically, there is no advantage to being for a merger when it first comes out until you understand all the facts.

Glassman: Sure. Well, thank you. I greatly appreciate it.

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