- The Washington Times - Friday, October 11, 2002

The Federal Communications Commission yesterday blocked EchoStar Communications Corp.'s $18 billion proposed acquisition of Hughes Electronics Corp.

FCC Chairman Michael Powell said the union of EchoStar and Hughes, which markets DirecTV, would harm consumers by creating a monopoly in the satellite-television market and boosting rates for satellite and cable services by eliminating competition. Combined, the companies hold 95 percent of the market.

"The commission cannot find that this merger is in the public interest," Mr. Powell told reporters.

The unanimous decision doesn't mean the deal is dead, though it doesn't look good.

The companies have 30 days to file an amended application with the agency to address concerns, said W. Kenneth Ferree, director of the FCC's media bureau.

The FCC will send its findings to an administrative law judge for a full hearing. Hearings typically aren't held for at least 45 days, FCC general counsel Jane Mago said.

The companies also will continue working with the Justice Department, which is scrutinizing the deal to see if there are antitrust concerns.

"We will continue to work aggressively within the context of this FCC process to achieve approval of the merger," the companies said in a joint statement.

The merger of EchoStar, based in Littleton, Colo., and Hughes, the El Segundo, Calif., company owned by General Motors Corp., would create the second-largest pay-television company behind AT&T Corp.'s combined holdings.

DirecTV has 10 million customers. EchoStar has 6.7 million subscribers. Cable companies have a combined 73.6 million customers.

EchoStar founder and Chairman Charlie Ergen is banking on regulatory approval based on cable's dominance in the pay-television market. Mr. Ergen, whose family owns 95 percent of EchoStar, long has argued that combining his company with DirecTV would help consumers by offering a stronger rival to cable companies, widely criticized by consumer groups for raising rates.

Cable rates have risen 45 percent since 1996, according to the Consumers Union.

In promoting their merger plan, EchoStar and DirecTV offered uniform pricing nationwide to ease fears that the new company would want to raise rates, especially in rural areas where no cable companies provide consumers with a pay-television alternative. About 13 million U.S. homes have no access to cable television.

The FCC said the national pricing plan offered by the companies is unlikely to be effective in protecting customers.

The companies also said they would carry local channels in markets where the companies don't offer them now and provide high-speed Internet access to places not served by cable television.

"If economics has taught us anything, it is that competition, not regulated monopolies, work better," Mr. Powell said.

Yesterday's decision was the first time the FCC has turned down a media merger since 1967.

Some said monopoly concerns made it likely the FCC would block the merger.

"We were not surprised, from an antitrust standpoint. It combines the number one and number two satellite companies in the country," said David Hoover, an analyst at technology research firm Precursor Group.

Others were surprised the FCC didn't ask the companies to overcome the deal's shortcomings.

"It's hard to understand how the FCC thinks that it's helping consumers by blocking, rather than restructuring, this deal. It was bad enough for consumers when Congress deregulated cable monopolies and allowed rates to skyrocket. But for regulators and antitrust officials to hinder efforts to make satellite more competitive with cable simply adds insult to injury," said Gene Kimmelman, senior director for public policy and advocacy at the Consumers Union.

Company officials asked the FCC this week to delay making a decision.

"All they did was ask us to wait," Mr. Ferree said. "But we were ready to act."

The FCC began its review Dec. 21, 2001. The companies have set Jan. 21 as the deadline for approval.

If the deal fails, EchoStar may have to pay Hughes a $600 million breakup fee.

EchoStar closed at $16.97 a share on the Nasdaq Composite Index yesterday, down 3 cents. Hughes closed at $8.15 a share on the New York Stock Exchange, down 25 cents.

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