A pretty stinging rebuke And yet …

“I don’t see how they can not go down this road again,” says Jimmy Schaeffler of The Carmel Group.

So what makes the companies (and clearly investors) think that things might be different this time around?

Last week shares of DirecTV and Dish Network jumped on news thatDish CEO Charles Ergen had approached his DirecTV counterpart, Mike White, about the two companies merging. (Shares are still riding at 52-week highes.) Neither company has officially commented on the rumors but most pundits thinks both parties are seriously considering a merger.

This isn’t the first time the two companies have danced this dance. The two biggest satellite TV providers attempted to merge back in 2001. At the time, the two companies argued that the government should approve the marriage because Dish and DirecTV didn’t really compete against each other but against the cable guys and that separated, they offered weak competition.

The FCC did not buy any of the arguments. Then-chairman Michael Powell wrote in his statement rejecting the proposed merger:

The combination of EchoStar and DirecTV would have us replace a vibrant competitive market with a regulated monopoly. This flies in the face of three decades of communications policy that has sought ways to eliminate the need for regulation by fostering greater competition. I decline the invitation to turn our national communications policy back so many years.

A pretty stinging rebuke And yet …

“I don’t see how they can not go down this road again,” says Jimmy Schaeffler of The Carmel Group.

So what makes the companies (and clearly investors) think that things might be different this time around?

Changing Technology

The way we consume video has changed dramatically in the last 12 years. Back then we were limited to our TV services for at-home content. Today there are a plethora of Internet options like Netflix NFLX +3.66%, Hulu, YouTube and iTunes. You no longer even really need a video provider to watch all the TV you want. The satellite guys are competing as much with broadband providers as they are with cable companies (although often those two are one and the same).

That means the companies would be able to argue that they are weaklings competing in an increasingly crowded field. In 2001 subscriber rates at the satellite companies were still growing fast. Today they are stagnant. The argument that together, the satellite companies could provide a viable competitor to the growing power of the cable companies suddenly looks more viable.

Comcast CMCSA -0.22% Time Warner TWX +1.07%

No one doubts that the floated rumors have a lot to do with the proposed Comcast Time Warner merger. If the FCC allows Comcast to gobble up Time Warner Cable, the new company will have 30 million customers and a cable monopoly in some of the biggest markets in the country. That makes it much harder to argue that a merged Dish DirecTV poses a monopoly threat. To the contrary, it makes a bigger, stronger satellite company look like a stronger competitor against Comcast, especially if as part of the merger the FCC imposes price limitations on a merged satellite company, especially in rural areas where cable isn’t available. A merged Comcast Time Warner Cable would also point to a more permissive attitude toward media mergers at the FCC. The government organization might have a hard time arguing against a satellite merger after approving a big cable merger.

Sirius XM

As Schaeffler of The Carmel Group points out, the last time Dish and DirecTV tried to merge was before satellite radio providers Sirius and XM won approval from the FCC to become one company. In 2008 the FCC approved the merger saying it would actually give consumers more choices and flexibility. At the time, the satellite radio industry looked a bit like the satellite video industry does today. The two companies were competing in a small market against plenty of competitors like terrestrial radio, iPods and online radio services. If the FCC decides once again that the satellite business act as vital competitor in the market, and there is a national interest to keeping that competitors alive, it could approve the merger.


Dish is sitting on 56 megahertz of spectrum. The company has spend $5 billion investing in wireless spectrum. In a recent conference call, Ergen said the company could have spent that money to acquire an additional 5 million subscribers but, he added: “We don’t think those extra 5 million customers would have the value strategically or from a shareholder value perspective.”

It’s unclear right now what Ergen intends to do with the spectrum. He could sell it off or use it to entice a telecom to buy Dish. But he could also use it as the basis for a wireless build out. Dish recently made an interesting deal with Disney that gives the satellite company the right to offer Disney channels, including ABC and ESPN, online. The rights mean that Dish could, theoretically, one day offer Disney stations as a standalone subscription service to customers who don’t even have Dish.

Dish becoming what’s known as an over-the-top play is a very compelling possibility. The company already has standing relationships with all of the big content players and an over-the-top offering would be a serious competitor to a merged Comcast Time Warner. The power of a new, national, over -the-top offering becomes much more powerful when instead of Dish’s 14 million subscribers you have a Dish and DirecTV’s combined 34 million subscribers to market the service to.

All of this is, of course, theoretical for now. But don’t be surprised if it turns out these rumors are true.

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