Suppose you lived in a town—and many in rural America do—that had only two supermarkets and they merged so that you had only one store to buy food. You'd feel pretty outraged. With no choice, you'd pay higher prices and almost certainly suffer worse service.
Actually you might not feel much better if you had a choice of three supermarkets and two of them merged so you were left with only two. What economists call a "duopoly" is not much different than a monopoly. Two firms tend not to compete very hard against each other, and the result tends to be higher prices and inferior service compared to markets where there are three competitors.
Unfortunately, these hypotheticals may become a reality for multichannel TV services nationwide if the proposed merger between the nation's top two satellite TV companies, DirecTV and EchoStar, is allowed to go through.
The merging parties recently defended their alliance before the House Commerce Committee by continuing to claim that the merger is necessary to compete effectively with cable TV systems around the country. But consumers—and the federal agencies reviewing the merger—should beware of the TV wolves in sheep's clothing.
The reality is that while the nation does have many cable companies, hardly any compete in the same geographic market. Virtually all have cable franchise monopolies from municipalities and the only real competition they face in those markets is from the two top satellite TV providers. That is why the proposed merger will shrink the number of multichannel TV providers in most of country from three to two.
For about a third of the nation's families, or about 40 million households, the result would be even worse: a monopoly. Almost 20 million homes have no access to cable TV, so letting EchoStar and DirecTV hook up will produce a monopoly. Effectively the same thing will happen in about another 15 million homes throughout rural America that are served by small, typically family-owned, cable systems that are gradually dying because they offer fewer choices and analog service, generally at higher prices, than the two digital satellite TV providers.
The claim that the merger is necessary for satellite to compete with cable is ridiculous. From December 1996 to June 2000, vigorous competition provided by satellite has raised the number of customers from a little more than 4 million to just under 13 million, an increase of more than 200 percent. During the same period, the cable industry has been able to add only 4.5 million new customers, an increase of about 7 percent. Between June 1999 and June 2000, the direct broadcast satellite companies got about three out of every four new subscribers, many of whom switched from cable to DBS. Looks to me like satellite is doing pretty well right as it is; take away the only competition that exists now and the almost certain result will be a loss of competition.
If you're like our family, which now has a multichannel TV provider, I'll bet you've waited for days to be hooked up or serviced. And that's with the limited competition that exists now. Reduce or take away that competition, and I'll bet we'll all be waiting a lot longer for those service people—and probably paying higher prices to boot.
One obvious way to prevent these worst-case outcomes is for the Justice Department to kill the merger. But there's another option: let the merger go through, but require the parties to sell off a "slot" in their allocated spectrum so that someone else can compete with them. They keep the money, which doesn't hurt them, but they keep competition alive.
There's an advantage to the sell-off alternative. One obvious bidder for the rights to broadcast satellite services is Rupert Murdoch's News Corp., which recently lost out in the bidding for DirecTV to EchoStar. But EchoStar should and will be eager to solicit—and accept—offers from other companies since News Corp. has content that it could bundle with any satellite service. Regulators and policymakers likewise should be open to other options. They should be concerned about furthering the trend toward such "vertical integration" of content and delivery systems, which might further balkanize the television industry. Whatever option is chosen, people who love their TV choices and service now should unanimously be opposed to this merger, which could go through early next year. The government should act in their interest.