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Dish Loss Fuels Rumors

8/08/2008 8:00 PM Eastern

After Dish Network registered a historic loss of subscribers in the second quarter, there was speculation last week that CEO Charles Ergen will renew his quest to merge his satellite-TV service with rival DirecTV.

But a number of industry analysts said such a deal was unlikely, because they questioned whether it would make sense for DirecTV, the dominant satellite provider, or if such a union could ever secure regulatory approval.

In fact, DirecTV CEO Chase Carey himself last week publicly dismissed the prospect of a Dish-DirecTV combo.

The performance of DirecTV, now in 17 million homes, this year has far outstripped Dish, which has 13.8 million subscribers. Last week, DirecTV reported a gain of 129,000 subscribers in the second quarter, just a hair ahead of the 128,000 increase it saw in the year-ago period. Registering record-low churn and much success with its robust HDTV offering, DirecTV — despite the terrible economy and the housing crisis — beat some Wall Street estimates.

It was a much different story in Ergen’s camp, where Dish Network reported it lost 25,000 subscribers. That was the first customer loss ever reported by a U.S. satellite-TV provider, according to Sanford Bernstein analyst Craig Moffett.

Ergen last Monday blamed Dish Network’s subscriber loss on the bad economy and housing market; signal piracy; operational problems at call centers; and his company’s lagging behind DirecTV in terms of HDTV rollouts.

The next day, The Wall Street Journal reported that Ergen was interested in once again pursuing a merger with DirecTV, whose major shareholder is John Malone’s Liberty Media. Ergen tried to engineer such a deal in 2001, but was thwarted when federal regulators essentially wouldn’t sign off on his plans.

During DirecTV’s second-quarter conference call with analysts, Carey was asked about a potential Dish-DirecTV merger.

“In terms of the merger with EchoStar, we really have nothing new to say,” Carey said. “I don’t know whether the Journal needed to fill a page or what, but I have nothing. There’s really nothing.”

He also said that he doesn’t believe that recent federal regulatory approval of the combining of Sirius Satellite Radio and XM Satellite Radio Holdings paves the way for a satellite-TV merger.

The Sirius-XM satellite-radio merger was “probably a minor positive, not a major positive,” in terms of opening the door for a DirecTV-Dish merger, according to Carey.

“There are a lot of differences between the businesses,” he said. “It certainly doesn’t change the world from black to white.”

Carey also reiterated what he has said before: DirecTV and Dish Network are open to working together, if it makes financial sense.

Some Wall Street analysts, such as Thomas Eagan of Collins Stewart, agreed with Carey about regulators being unlikely to sign off on a Dish-DirecTV merger. Although satellite TV can claim a lot of competition right now — not only from cable but from the telcos — “the vast majority” of rural homes get their TV via satellite, Eagan wrote in a report last week.

A Dish-DirecTV merger would “create one company as a source of TV for much of rural America,” which the Federal Communications Commission and the Department of Justice would prohibit, Eagan wrote.

He also believes the looming transition to all-digital broadcast signals next February factors into the equation.

“I think the regulatory environment now is harder, not easier, to get a deal done,” Eagan said.

Many of the 13 million to 15 million antenna-only homes that receive TV over the air are in rural areas, according to Eagan. Many of those homes will have to turn to satellite to get digital signals, he said.

“So to reduce the number of [satellite] players from two to one I just think would make the digital migration that much more difficult,” Eagan said. “The last thing the FCC wants to do is to derail this highly anticipated, highly watched digital migration.”

But one industry analyst who believes a Dish-DirecTV merger could pass regulatory muster, and that the deal makes financial sense, is The Carmel Group chairman Jimmy Schaeffler, who has consulted for both satellite companies. A merged, 31 million-subscriber satellite-TV giant could be more efficient by combining Dish and DirecTV departments, such as marketing; secure more leverage with programmers; and really focus on gaining new customers.

“Common sense says that their business works really well if you can combine assets,” Schaeffler said. “That’s why it makes sense now and it will always make sense.”

To address regulators’ fears about rural America, Schaeffler said the combined Dish-DirecTV could simply charge the lowest price if offers anywhere in the country to customers in rural areas.

But April Horace, a Janco Partners analyst, doesn’t see much synergy in a Dish-DirecTV merger at this juncture. Both satellite providers already have satellite fleets in place to deliver national and local HD networks, she said. And in some cases Dish and DirecTV’s equipment, such as conditional-access gear, is not compatible, according to Horace.

As to whether federal regulators would approve a Dish-DirecTV merger, Horace said that depends on who gets elected president in November.

 

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April