FCC rejects EchoStar-DirecTV Merger

The FCC this afternoon unanimously rejected EchoStar’s efforts to bid with Hughes Electronics’ DirecTV satellite service, probably scuttling the $16.2 billion combination of the nation’s two biggest direct broadcast satellite players.

In designating the application for a full evidentiary hearing before an administrative law judge, the FCC, to a commissioner, determined that a merged company would probably cause more harm than good to the competitive market, create the potential for higher prices and lower quality service, and inhibit technological innovation.

The two companies, which earlier this week tried to stall FCC action by offering to make major revisions to the proposal, said they would continue to work for approval.

In a joint statement, the companies promised to “work aggressively within the context of this FCC process to achieve approval of the merger,” although what exact steps can be taken in the face of such massive opposition were not immediately clear.

What was clear was the repugnance the FCC felt toward the deal and arguments that EchoStar’s DISH Network and Hughes’ DirecTV needed to merge to battle a common opponent in cable TV.

“The facts undermine these claims,” said Chairman Michael Powell. “EchoStar and DirecTV compete vigorously, not only with cable, but with each other” and “DBS subscriber growth rates are 2.5 times larger than those of cable.” Powell also rejected claims that the merger is necessary to increase local broadcast station coverage, suggesting that “each company standing alone will be capable of offering local broadcast stations to 80-85% of American homes in a very short period to time.”

The companies got 30 days to amend their application to answer the FCC’s concerns and to file a petition to delay the evidentiary hearing.

In the meantime, the Justice Department is still reviewing the deal and is expected to interview EchoStar CEO Charlie Ergen later this month, based on earlier promises to revise the deal.

Even with the two parties promising to move forward, things look bleak for the merger.

“At the end of the day, the applicants are asking us to find that eliminating a current, viable competitor from every market in the country would somehow serve the public interest,” said Commissioner Michael J. Copps. “For the vast majority of consumers, it would result in a reduction in competition, reducing the number of multi-channel video programming providers for many consumers from three to two or from two to one, depending on whether the consumer today has access to cable service.”

The FCC’s ruling left no indication regarding Comcast’s pending acquisition of AT&T Broadband, which would create a huge multi-channel entity in the cable industry. Commissioner Kathleen Abernathy, in her statement, in fact, said that the commissioners focused strictly on EchoStar-DirecTV, not the television delivery industry.

“I have no doubt that business combinations in the multichannel video market may be pro-consumer, and it would be a mistake to equate bigness with badness,” she said. “But our task is to review only the application in front of us and to weigh the potential benefits against the threats of competition.”

Based on that review, she said, “The public interest would not be served by granting the application.”