TCS Daily

Shotgun Mergers

By Duane D. Freese - May 9, 2002 12:00 AM

While marriages may be made in heaven, a lot of business mergers are more like shotgun weddings - done out of necessity.

That certainly seems the case with two major media marriages now in the prenuptial stage - Comcast's $47 billion proposed purchase of AT&T's cable division and Echostar's $30 billion bid for General Motor's Hughes satellite television system.

They are ventures built on the need to scale back on losses and develop necessary economies of scale to remain competitive in the viciously competitive telecommunications world.

Of course, some members in Congress and consumer spokesman view these deals not in that light, but under the notion that they'll close off consumer choice in programming or provision of video, broadband or telephony services.

At a hearing last month, Sens. Mike DeWine, R-Ohio, and Herbert Kohl, D-Wis., both gnashed their teeth at AT&T's sale of its cable unit to Comcast.

"The FCC must thoroughly examine cable ownership limits and establish an appropriate limit that would ensure healthy competition and a diverse marketplace. If they can't do it, the Congress will need to take a look at it," DeWine opined.

And David Rubin, dean of Syracuse University's Newhouse School of Public Communications, went over the top, claiming the merger "makes it essentially impossible for an independent program producer who is unwilling to strike a deal with the cable system to get access" to the general viewing audience.

Like those independent program producers had a lot of opportunity to do that when there were only three national television networks.

At congressional hearings in February, other members made similar worried sounds about Hughes' DirectTV and Echostar's Dish satellite systems holding hostage rural users.

These populist sounding arguments ignore the technological realities, the competition that's out there and the economic conditions in which the mergers are taking place.

Bottom line is that all of these companies lost money in the first quarter of this year. Echostar's first quarter loss amounted to $38 million; Hughes, $156 million. Comcast lost $89 million, while AT&T lost $975 million for its combined phone and cable businesses.

While much of these losses has to do simply with the recession and the heavy investment they've made in their new services - AT&T pumped $100 billion into its broadband venture - nonetheless they reflect companies not seeking to extend monopolies but simply find formulas that allow them to compete in the future - with each other and other communications providers.

The point of these mergers is, quite simply, survival.

The media has played up how "big" each of the merged entities would be. AT&T-Comcast cable would have a footprint in 41 states, with 22 million subscribers. Echostar-Hughes would have a combined 16 million subscribers.

Neither one, though, matches the customer base of Verizon or SBC, with more than 30 million customers each for their telephone services.

If cable and satellite are eventually to compete in the provision of full-range telecommunications services, they'll need to draw on a similarly high level of subscribership.

Meanwhile, as it is, the two "video" delivery giants substantially compete with each other. AT&T in the last quarter, for example, lost 170,000 subscribers, while Echostar added 335,000.

And the FCC has set the stage for increased competition for each of them in the years to come. It gave seven satellite operators, including startups Skybridge and Teledesic, the go ahead to apply for licenses to provide global broadband Internet access services riding on existing airwaves now occupied by Dish and DirectTV.

The caveat is they must accomplish the usage without interfering with the satellite broadcasts, something the companies say is technically possible. Northpoint Technologies is standing in the wings to do something similar combining fixed wireless using the satellite airwaves for video and data services.

And if that isn't enough, Europe's SES Global SA announced plans to invest $250 million into a satellite project here.

In such a milieu, as Comcast President Brian Roberts, told the Senate last month, "If we don't carry the best programming, we're going to lose our customers."

And if you don't provide a total service package, somebody else is likely to do so - soon.

House Majority Leader Richard Armey was on target when he wrote the FCC about the Echostar-Hughes merger: "Customers will be better able to determine whether they are able and willing to pay for the services the merged company plans to market than Congress or any federal agency. Why should we make the choice for consumers what they should or should not purchase and at what price?"

These media marriages have hardly been made in heaven. But there may well be bliss at the end of them for consumers and investors - but only if government doesn't use its antitrust shotgun to keep them apart.


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