Transcript EchoStar

SKY WARS : The
Attempted Merger of
EchoStar and DirecTV
Presented by:
Brennan
Han
Tasmin
Intention to Merge
On October 28,2001, EchoStar Communications
Corporation (Dish Network) announced its
intention to acquire the assets of Hughes
Electronics Corporations (DirecTV).
What are They?
• EchoStar and DirecTV are two Direct Broadcast Satellite
(DBS) Companies.
• Provide multichannel video programming distribution
(MVPD) services.
• Consumers of these services are located in United
States.
Directv: Some facts
•
•
•
•
Launch time: June,1994
DBS Type: Higher Power all-digital DBS Service
Requirement: a receiving dish the size of a large pizza.
Attraction for Consumers: more programming with a
smaller dish antenna.
• 1999: Purchased Primestar and migrated all primestar
subscribers to its equipment.
Echostar: Some facts
• Launch Time: March, 1996.
• DBS Type: Higher Power all-digital DBS Service.
• Receiving Format: The receiving dish formats are similar
for EchoStar and DirecTV.
• Company size: Smaller than DirecTV.
• Compatibility: Two systems were not compatible, since
they used different signal encryption methods.
Some positive facts for both
companies
•
•
•
•
•
•
Only these two companies were ruling in DBS market.
1997-2001, Sales of DBS System was growing fast.
DirecTV had grown to 10.9 million subscribers.
EchoStar had more than 7.5 million customers.
EchoStar had capacity for 500 channels.
DirecTV had capacity for 460 channels.
Merger’s Arguments
• Increase of Efficiency
• EchoStar and DirecTV do not compete with each other
but with Cable Company.
• Competition with Cable company will be a constraint to
charge higher price.
Opponents’ Arguments
(Department of Justice (DOJ) and the Federal Communications
Commission (FCC))
• If the merger were allowed to proceed, it would
eliminate competition between the nation’s two most
significant DBS services and substantially reduce
competition in the MVPD business to the detriment of
consumers throughout the United States.
Product market definition
What are the relevant Market Products?
• Services within MVPD cable (according to FCC):
» Cable
» Direct Broadcast Satellites (DBS)
» Multi-channel Multipoint distribution services
(MMDS)
» Satellite Master Antenna Television (SMATV)
» C-band
National MVPD Subscriber Shares
(june 2001)
MVPD Subscribers
Cable
DBS
Percent of
MVPD
Subscribers
78
18.3
SMATV
1.7
C-Band
1.1
MMDS
0.8
Substitutes
• C-band service- highly inefficient
- not an acceptable substitute
• Over –the- air broadcast television-poor reception , does
not include various programs (i.e. ESPN or CNN)
-not an acceptable substitute
• Digital Cable Systems-higher quality, more channels,
Pay-per view movie
-closer substitute for DBS
• EchoStar and DirecTV are the closest substitutes for
each other (narrower market for same service and highly
concentrated).
Geographic Markets
• DBS companies provide nationwide services
• Cable companies provide local services.
• EchoStar and DirecTV’s national pricing will depend on
cable prices and service offerings at the local level.
• EchoStar and DirecTV have targeted promotions at local
level and have ability to adjust price locally if they chose
to do so
Concentration Test: HHI
• FCC staff computed concentration indices for geographic markets
corresponding to 4984 local cable systems.
• For DBS vs All Cable systems :
Median post merger HHI=5653, median increase = 861
• For DBS vs Digital Cable Systems:
Median post merger HHI=6693, the median increase = 206
Note- these figures actually understating the significance of the proposed
merger since DBS was experiencing rapid growth at that time. And
additional growth will increase the market shares. Increased market
shares will increase concentration.
Market Definition Analysis
• A merged EchoStar and DirecTV would have sufficient
market power to raise prices above pre-merger levels;
-Narrow Market ( only two DBS provider) and Highly
concentrated (market share is even growing more)
• DBS subscribers (3%-19%) in some areas will face a
monopoly price, where they can not switch their service
to Cable companies.
Competitive Effects
• Would New EchoStar raise prices after the merger?
• Cable may provide competition and cause lower DBS
prices,
if the prices are nationwide- non-cable and cable
regions alike.
Proponents of the Merger
• DirecTV
DBS
v.
EchoStar
v. Cable
• Proponents claim DBS providers compete more to attract
Cable customers than customers of each other.
• However…
Evidence of Competition between
Directv and Echostar
• Similar prices and similar services
Evidence of Competition between
Directv and Echostar
• Both companies’ Equipment and Installation prices
dropped from several hundreds to zero.
• EchoStar itself acknowledged DirecTV as competitor in
papers filed to court
• Email saying- “we have signal in Alaska and D(irec)TV
doesn’t have much. We don’t have competition there…”
Difficulties in Evidence
• If DirecTV and EchoStar had prices way below
cable, does it mean cable is not a significant
competition?
- The companies may be competing to
attract actual or potential cable customers.
Evidence of Competition between
Directv and Echostar
• Both EchoStar and DirecTV had prices slightly
below cable
Cable $33.81 - 59 Channels
EchoStar $31.99 - 60 Channels
Coordinated and Unilateral
Effects
• Coordinated Effect –
Merger will create
environment in which it
will be beneficial for the
cable firms to collude
• Unilateral effects –
Merged firm has enough
market power to increase
prices above pre-merger
levels
Unilateral Effect
• What we want to know:
Post merger price,
Pre-merger price (already know)
Unilateral Effect
• Post merger price of New EchoStar
(Pj - MCj)/Pj=-1/ɛjj
• Elasticity is hard to estimate, because little price change
occurred.
• Alternative method :
$1 increase in DBS = $1 decrease in all substitute MVPD
Table 4-2
Price
Service
Expanded Basic
Premium Cable
DBS
Antenna
1.30
.92
.12
Expanded Basic
-1.54
.92
.29
Premium Cable
1.26
-3.18
.49
DBS
.93
1.17
-2.45
Unilateral Effect
• P – MC/P = -1/-2.54
• New EchoStar will charge 70 percent above MC
• But, is this larger than pre-merger prices?
Marginal Production cost is
estimated
• In order to find postmerger price we need to know
Marginal production cost
• MacAvoy estimates of MC
DirecTV $26.80
EchoStar $30.39
• Postmerger prices v. Premerger Prices
DirecTV $44.20 v. $31.99
EchoStar $50.12 v. $30.99
Marginal Production Cost
Derived
• Alternative method of estimating Marginal Production
Cost:
• Use own- and cross-price elasticity of demand
• Elasticity gives premerger Lerner Indices
• With premerger Lerner Index and price, we can get an
estimate of MC.
• Of course this value of MC will give us postmerger price
Nash - Cournot Competition
• Assumption: both firms choose output levels to maximize
profit under assumption that output of other firms are
fixed
• Premerger prices would satisfy:
(Pj - MCj)/Pj = -Sj/ɛ
Sj : share of firm j in DBS market
ɛ : elasticity of demand for DBS (negative number)
RHS : reciprocal of firm-specific elasticity of demand for
product j.
Getting the Marginal Cost
• (Pj - MCj)/Pj = -Sj/ɛ
• Example:
If EchoStar had 40% of share, it’s firm-specific elasticity
of demand would be:
reciprocal of 0.4/(-2.54) = -6.4
With Premerger Price:
Dtv $31.99 + $5.99
Estar $30.99 + $5.99
We can get MC:
(P – MC)/P = 1/6.4
P – MC = P/6.4
P – P/6.4 =MC
P (1 – 1/6.4) = 36.98*0.84
= 31.20
Derive Post-Merger Price using MC
• Assume that marginal cost does not change
• We have two MC’s – choose the lower one
$28.94
• Post-merger price is :
P = MC/(1+1/ɛ)
47.73 = 28.94/(1-1/2.54)
Pre vs. post – merger prices
• Average pre-merger price $37.48
• Post-merger price $47.73
-> 27 percent increase
Interpretation of results
• Price Increase depends on:
- estimated price elasticity
- intensity of competition before the merger
- Marginal costs before and after the merger
Interpretation of results
(Pj - MCj)/Pj = -1/ɛjj
• Intensity of competition before the merger
affects the pre-merger price-cost difference
→this difference in cost (price is given) →cost
affects post-merger price
• If actual competition were more intense than
assumed, then the price will increase more than
predicted
• Higher MC → higher prices
Merging parties: Churn Data
• Churn Data : More
consumers move from
DBS to Cable than
from one DBS
company to another.
• Churn data might
indicate that DTV and
EchoStar are close
substitutes and have
similar prices,
consequently, the
customers will rarely
switch between these
companies.
Dynamics of Consumer adoption
of satellite tv
• Observe the price change of satellite TV
• Price of DBS has fallen (equipment and
installation) – Early adopters’ higher willingnessto-pay
• Before merger- Consumer surplus exists due to
competition and willingness-to-pay
• After merger- surplus may move to producers
Dynamics of Consumer adoption
of satellite tv
• The two forces that check price increase
1. Competition between DTV & EchoStar
2. Competition between DBS & Cable (remains)
DBS prices could stay low because new consumers
are more price-elastic, but after DBS subscribers
increase they might exploit the installed base of
DBS subscribers.
Dynamics of Consumer adoption
of satellite tv
• New EchoStar will raise prices if installed base is
relatively larger than arrival rate of new
customers
• Switching cost:
1.Sunk cost in installation and equipment
2. Long-term purchase contracts
3. Time and inconvenience of researching and
having installed MVPD alternatives
National Pricing
What Will Protect Consumers?
The Firms’ Answer:
Commitment to National Pricing
In actuality, national pricing simply averages the price
increase from the merger across all consumers.
National Pricing
Elasticity of demand
in cabled areas
Elasticity of demand
in non-cabled areas
ŋDBS = scŋcDBS + sncŋncDBS
Elasticity of Total Share of demand in
Demand
cabled areas
Share of demand in
non-cabled areas
Goolsbee and Petrin, 2004: Low estimates of demand elasticity
National Pricing
Price of DBS service
Price of DBS service
QDBS = qcDBS(pDBS) + qncDBS(pDBS)
Total demand for
DBS services
Demand in areas without
Demand in cabled areas
access to cable
Entry
Satellite Positioning Limitations
“Wing” Locations
New Technology: “Short-Spaced” Orbital Locations
Barrier: Regulatory Approval
SES Americom, 2002
Intelsat, 2005
Other Barriers: High Costs, Channel Licensing Contracts
Remedies
DirecTV and EchoStar Proposals:
• Transponder Assets
• Joint venture: set-top boxes and local programming
• Retail outlets
Remedies
Feasible?
2 Year Time Horizon (in DOJ/FTC Merger Guidelines)
High Initial Costs
Terms of Assistance for Cablevision
… Probably Not.
Cablevision in 2005
Efficiencies
Scarce Radio Spectrum
Duplicate Channels
Merger would allow:
More local coverage
Additional high-definition content
More effective competition with cable
Aftermath: What Happened?
Antitrust authorities blocked the
merger
Reflections
Pre-merger, firms believed that they could
not make the improvements necessary to
match the programming content provided by
cable systems on their own
The reality: both EchoStar and DirecTV
found ways to increase capacity and expand
programming relative to digital cable–
without merging.
Currently (2005):
EchoStar
DirecTV
26 HD Channels
“America’s largest HD lineup”
8 Exclusively HD Channels,
numerous other regional HD
networks
Pay-Per-View
Pay-Per-View
Premium Channels
Premium Channels
Local broadcasts in HD
Local broadcasts in HD
Cable Networks
Average of 11 HD Channels, including local broadcasts
No significant increase over the past two years
Relying on ‘bundling’ of internet and phone with TV
Currently (2006):
EchoStar
DirecTV
Over 170 DMA’s
Over 143 DMA’s
96 percent of TV households
94 percent of TV households
Beforehand, firms claimed that only a merger
would give capacity to provide local broadcasts to
100 DMA’s total
How Did they do this?
Signal Compression Technology
Additional Satellites
EchoStar: 4
DirecTV: 5
(since 2002)
Consumer Effects
Considerable risk of higher prices
Estimate of $10 increase in monthly rate
Even with just a $2 increase, still exceeds the plausible efficiency
gains from the merger
New developments…