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EchoStar Corp.’s $600 million gamble that it will win antitrust approval to acquire DirecTV Inc. is risky, but experts said the company has crafted a novel theory that has a chance of succeeding. The company argues that a merger would bolster competition because it would let Littleton, Colo.-based EchoStar challenge cable in about 100 markets. Currently both EchoStar and DirecTV lack the spectrum to fully serve more than 35 to 40 markets and about half of U.S. households, company lawyers said. EchoStar and DirecTV started making this argument this month to the U.S. Department of Justice. If the government accepts it, the companies may complete their $25 billion deal. If not, the case will go to court. EchoStar must pay DirecTV’s owner, General Motors Corp., $600 million if a judge rejects the merger. The EchoStar argument is unusual because in nearly every other industry there are alternative means to increase capacity, such as building new factories or hiring more employees. But for direct satellite broadcasting, the Federal Communications Commission has allotted a set amount of spectrum. This becomes an issue as DBS providers move into new markets. Consumers want local and premium channels. For the premium channels, that’s not a problem because the same piece of spectrum used to transmit HBO in Boston may also be used in Des Moines, Iowa. The same is not true for local channels. Each local channel eats up spectrum that cannot be used elsewhere. With many markets having five network affiliates and several independents, the amount of required spectrum increases significantly every time a DBS provider enters a new market. “We cannot expand our product or our ability to serve the consumer,” said Ira B. Millstein, a partner at Weil, Gotshal & Manges in New York, who represents DirecTV. “We cannot build another factory. That distinguishes us from any other cases.” Lawyers for EchoStar and DirecTV contend that the combined company would have twice the amount of spectrum, which means they could offer local channels to about 100 markets with about 80 percent of U.S. households. “We will be able to expand our output into many more markets than we are in right now,” said Peter Standish, a Weil Gotshal partner who also represents DirecTV. Experts said the argument has merit. “The argument makes sense and it is the best argument they have,” said Blair Levin, an analyst at Legg Mason Inc. in Washington. “If you don’t buy this argument, then there is no way the merger goes through.” For the spectrum argument to succeed, EchoStar must show there is not a more competitive alternative to the merger. Antitrust regulators in the past have suggested that limited joint ventures often can be more competitive than outright mergers. In this deal, the joint venture could control a pool of spectrum that would transmit channels both companies want to offer. The rest of the spectrum would be used by the companies to tailor their services to customer needs. Millstein said such a joint venture would not work because EchoStar and DirecTV use different technologies for the set-top boxes that descramble programming. To permit the reception of a joint signal, both companies would have to install additional equipment in every household served, he said. “A joint venture would counter the efficiencies for the overall product especially against cable where they would have an integrated product,” he said. Levin cautioned against prematurely dismissing the joint venture alternative, saying the Justice Department may find the option preferable to a merger. He also said the government may inquire if there are other ways to expand absent a merger. “An issue is, could DBS invest in technology to squeeze more channels into available spectrum,” he said. “It may cost a lot of money but it is doable.” Levin noted that the cable industry already is investing billions of dollars to upgrade its pipes into homes so it can offer digital cable. The government may argue that it is only fair for DBS providers to make similar efforts to upgrade their technology before allowing a merger. Even if EchoStar prevails on its spectrum argument, the Justice Department could still challenge the deal if it believes it might result in tacit collusion among the remaining players. Right now most consumers have three options for paid television: the local cable company, DirecTV and EchoStar. After the merger, the consumer would have two choices. To antitrust economists, that is almost always an anticompetitive outcome because it is much easier for two companies to collude on price than it is for three. Lawyers for the companies said this is the wrong way to view the market. “That is a misconception,” Millstein said. “We are not competing with a monopoly called cable. It is not one company. We are competing with dozens of cable companies and some are quite big.” That means EchoStar and DirecTV see a national market for pay television rather than local markets. So for the conspiracy to work, EchoStar would have to collude with every major cable company in the U.S. Lawyers for the companies said not only would that be impractical but it would run contrary to antitrust theories on collusion, which hold that conspiracies are unlikely to survive if they involve more than a few players because companies will try to cheat. Also preventing collusion are the policies of EchoStar and DirecTV to price their services nationally, their lawyers argue. “Any price we are charging when we face off is the same price we are charging everywhere else,” Millstein said. “We never get away from that.” Millstein also said the industry is not prone to price fixing because the way it bills its consumers is so complex that it would be very hard for any company to know if the other is cheating. “There is no way you can keep uniform pricing in this industry,” Millstein said. “That is impossible.” Or is it? Albert Foer, president of the American Antitrust Institute, said the national pricing policy may actually be anticompetitive. This is because every cable company will know that it can set its price a few dollars above the EchoStar price without risk of retaliation. The cost for EchoStar to change its price nationwide would be high enough that it would not want to disturb the status quo, Foer said. “If it is a duopoly and one of them has a fixed national price, then that is not a recipe for price competition,” Foer said. So far no one is willing to declare the deal dead. EchoStar even has support from consumer advocates that typically oppose mergers. Andrew Schwartzman, president of the Media Access Project, said his group would prefer no deal. But if a merger must occur, EchoStar is far preferable to News Corp., which also bid for DirecTV. Schwartzman said there is no history of EchoStar trying to collude with cable companies. Rather, the evidence shows it has competed fiercely for customers against local cable monopolies, he said. “The history has been the only restraint on cable pricing is DBS,” Schwartzman said. Antitrust experts do not expect a decision from the Justice Department for at least six months. Copyright (c)2001 TDD, LLC. 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