Satellite Pie In The Sky?

In the mid-1990s if you would have suggested that a man known in Vegas casinos as a killer card counter would be poised to control the direct broadcast satellite (DBS) business in the U.S., someone would think that you were nuts.

Well EchoStar CEO Charlie Ergen has made a good living off of people who have underestimated (read: Rupert Murdoch) his tenacity. After putting up $2.75 billion of his own stock at the last minute when a key bank pulled its support and gambling a $600 million breakup fee if the deal isn't approved by the government, Ergen put together a $25.8 billion package to buy its arch-rival DirecTV from General Motors.

At minimum, with this deal Ergen can review DirecTV's subscriber lists and technology developments that are in the works. If this proposed merger, which should take around a year to be reviewed by the Department of Justice and the Federal Communications Commission, falls through those are not insignificant matters.

Retailers we interviewed for our coverage in our November 5 issue said that if approved, increased sales of HDTVs and better HDTV programming packages should result. Still, some retailers are concerned about the control of this lucrative business being given to one company. That concern is echoed by consumer groups and content providers, which would rather have more diversity when it comes to DBS or cable choices.

One little thing that Charlie, the government, the cable industry, consumer groups and anyone else weighing in on this merger hasn't discussed is profitability. While subscriber numbers for both DirecTV and EchoStar have risen over the years, and revenues continue to soar, both operations have reported annual losses. (EchoStar did report a $3 million profit in the third quarter, but is still running an annual loss of $172.6 million.) If the deal is approved and, except for the cable industry, there is no other competitor on the horizon, how much will Charlie jack up prices to pay for the merger? Will he be able to if the cable industry sees blood on the water and goes after him with aggressive promotions?

As we saw with Internet companies, eventually you have to make a profit. That reality should eventually register with lenders whether or not this merger is ever consummated.