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.
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."
Explicitly confirming the reported opposition to the EchoStar/Hughes deal among antitrust regulators at the Justice Department, the companies told the FCC Monday that they were planning to discuss the possibility of "major revisions" to the proposed deal.
Those revisions, say EchoStar and Hughes, would go beyond consumer safeguards already proposed by the companies, such as a single, national pricing plan that in theory would hold down DBS prices in areas in which satellite service doesn't compete with cable TV.
It appears that the DOJ won't pass judgment on the merger until Oct. 28 at the earliest. That's the day, according to the companies' FCC letter, when EchoStar and Hughes are scheduled to meet with the assistant attorney general and his senior staff.
Following a two-day deposition of EchoStar CEO Charlie Ergen last week, the Justice Department has requested time for an additional deposition. That deposition, to which EchoStar has agreed, has yet to be scheduled. The two companies are also preparing their antitrust remedy proposals to submit before the Oct. 28 meeting "to address areas of concern expressed by DOJ," they say. Those areas of concern aren't specified in the FCC letter.
What a Racket
But back to the numbers. Shapiro, who initiated EchoStar with a strong buy and Hughes with a buy, says he doesn't believe the fight between cable and DBS is a zero-sum game. "Although the market often treats the investment cases of cable and DBS as mutually exclusive," he writes, "we do not believe they are."
That being said, he writes in his extensive report that DBS operators will continue to claim a majority of the annual net additional subscribers over the next few year. DBS subscribers in the U.S., he estimates, will grow from 19.5 million at the end of 2002 to 27.5 million at the end of 2007, in comparison with a cable industry growing from 70.4 million to 73.8 million over the same time period.
In addition, says Shapiro, EchoStar should turn free cash flow positive in 2003 and Hughes in 2004. His firm has received compensation from Hughes and EchoStar over the past 12 months.
Among the DBS negatives pointed out by Shapiro and Rohan is that the cost of adding net new subscribers -- that is, new subscribers minus older subscribers dropping the service -- has regularly risen. Industrywide, calculates Rohan, it's gone from the low $800s in the fourth quarter of 2000 to an estimated $1,200 per subscriber.
Shapiro says, however, that free cash flow should peak as subscriber growth for DBS slows down.