EchoStar, Hughes See a Glimmer of Hope

As EchoStar Communications (DISH Quote) and Hughes Electronics (GMH Quote) try to salvage their merger, industry onlookers say they'll change TV's competitive landscape even if they don't.

On Monday, EchoStar and Hughes -- the nation's two big direct broadcast satellite services -- said in a letter to the Federal Communications Commission that they will soon be discussing "major revisions" to their planned merger with antitrust regulators at the Justice Department, which is passing judgment on the deal along with the FCC.

The letter confirms recent reports that the DOJ was likely to reject the consolidation of the DBS companies as originally proposed, and it likely delays any federal approval of the deal until November at the earliest.

Yet industry onlookers say that EchoStar's Dish Network and Hughes' DirecTV service will continue to eat into the cable business, even if they remain divided -- despite the increasing expense of adding new DBS subscribers. On Monday, Hughes fell 7 cents, to $8.92, and Echostar rose 7 cents, to $17.02.

More Share

Over the next five years, estimates Banc of America Securities analyst Doug Shapiro, satellite TV's share of multichannel television households in the U.S. will grow 24% to 28%. But cable TV's share will likely drop from 79% to 75%, says Shapiro. (Because some households subscribe to both cable and satellite, the percentages add up to higher than 100.)

"We expect that DBS will continue to take market share from the cable industry for the foreseeable future," writes Shapiro, who initiated coverage on EchoStar and Hughes last month.

Meanwhile, SoundView Technology analyst Jordan Rohan suggests one of several possibilities, none of them particularly promising for cable. Economic circumstances may be nudging consumers toward DBS, which is generally cheaper than cable, he says. DBS may be a particular threat in areas served by non-upgraded cable systems. And it's also possible, says Rohan, that the market served by DBS and digital cable systems with expanded program offerings is nearing saturation. "DBS competition is still alive and well," writes Rohan in a report issued Monday on the cable industry. "Consumers should benefit from this continued rivalry," he writes, "but shareholders may realize much smaller returns."

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