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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 ).
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On October 28,2001, EchoStar Communications Corporation (Dish Network) announced its intention to acquire the assets of Hughes Electronics Corporations (DirecTV).
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.
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.
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.
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
- not an acceptable substitute
-not an acceptable substitute
-closer substitute for DBS
Median post merger HHI=5653, median increase = 861
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.
-Narrow Market ( only two DBS provider) and Highly concentrated (market share is even growing more)
if the prices are nationwide- non-cable and cable regions alike.
DBS v. Cable
- The companies may be competing to attract actual or potential cable customers.
Cable $33.81 - 59 Channels
EchoStar $31.99 - 60 Channels
Unilateral effects – Merged firm has enough market power to increase prices above pre-merger levels
Merger will create environment in which it will be beneficial for the cable firms to collude
Post merger price,
Pre-merger price (already know)
(Pj - MCj)/Pj=-1/ɛjj
$1 increase in DBS = $1 decrease in all substitute MVPD
P – MC/P = -1/-2.54
New EchoStar will charge 70 percent above MC
But, is this larger than pre-merger prices?
DirecTV $44.20 v. $31.99
EchoStar $50.12 v. $30.99
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
(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.
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
P = MC/(1+1/ɛ)
47.73 = 28.94/(1-1/2.54)
-> 27 percent increase
- estimated price elasticity
- intensity of competition before the merger
- Marginal costs before and after the merger
(Pj - MCj)/Pj = -1/ɛjj
Churn data might indicate that DTV and EchoStar are close substitutes and have similar prices, consequently, the customers will rarely switch between these companies.
Churn Data : More consumers move from DBS to Cable than from one DBS company to another.
Observe the price change of satellite TV
Price of DBS has fallen (equipment and installation) – Early adopters’ higher willingness-to-pay
Before merger- Consumer surplus exists due to competition and willingness-to-pay
After merger- surplus may move to producers
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.
1.Sunk cost in installation and equipment
2. Long-term purchase contracts
3. Time and inconvenience of researching and having installed MVPD alternatives
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.
Elasticity of demand in cabled areas
Share of demand in cabled areas
Share of demand in non-cabled areas
ŋDBS = scŋcDBS + sncŋncDBS
Elasticity of Total Demand
Goolsbee and Petrin, 2004: Low estimates of demand elasticity
Price of DBS service
Demand in areas without access to cable
Demand in cabled areas
QDBS = qcDBS(pDBS) + qncDBS(pDBS)
Total demand for DBS services
Barrier: Regulatory Approval
SES Americom, 2002
Satellite Positioning Limitations
Other Barriers: High Costs, Channel Licensing Contracts
2 Year Time Horizon (in DOJ/FTC Merger Guidelines)
High Initial Costs
Terms of Assistance for Cablevision
… Probably Not.
Scarce Radio Spectrum
Merger would allow:
More local coverage
Additional high-definition content
More effective competition with cable
Antitrust authorities blocked the merger
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.
8 Exclusively HD Channels, numerous other regional HD networks
Local broadcasts in HD
26 HD Channels
“America’s largest HD lineup”
Local broadcasts in HD
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
Over 170 DMA’s
96 percent of TV households
Over 143 DMA’s
94 percent of TV households
Beforehand, firms claimed that only a merger would give capacity to provide local broadcasts to 100 DMA’s total
Signal Compression Technology
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