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A DISH/DIRECTV merger: To be, or not to be

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A DISH/DIRECTV merger: To be, or not to be

After years of speculation, recent moves by DISH Network Corp. have some analysts believing that a merger with DIRECTV may be on the horizon, though regulatory concerns could complicate any deal.

DISH recently named John Swieringa as a co-president of the company. In his new role, Swieringa will lead DISH's nascent wireless division, while fellow co-president Erik Carlson will head the satellite video and Sling businesses. Under this reorganized structure, the company can more easily split off into separate businesses, analysts said, potentially opening the door for a combination with DIRECTV. The latter satellite operator is jointly owned by AT&T Inc. and private equity firm TPG Capital LP.

"We have suspected that a split is coming, and this seems like a small step in that direction. We think it would make sense for a number of reasons, including paving the way for a merger of the [satellite] business with DirecTV and improving strategic flexibility at Wireless," NewStreet Research analyst Jonathan Chapin wrote in a research report.

DISH Chairman Charlie Ergen has repeatedly referred to such a merger as "inevitable," and DISH shares popped the week after Swieringa's Jan. 5 appointment. But several hurdles exist for any potential deal, including the prospect of stiff regulatory scrutiny, analysts say.

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History repeats

DISH and DIRECTV made their first attempt at a merger in 2002 when DISH operated as EchoStar Communications. Regulators cited the potential for a monopoly as a reason for their rejection. In 2022, a time in which households are increasingly opting for high-speed internet and streaming service subscriptions instead of cable and satellite plans, the merger between DISH and DIRECTV does not carry as large of a threat of a television monopoly, though it still exists.

"There are certainly places where it remains difficult to obtain the bandwidth necessary to use streaming services and there is a good argument that in such places, the deal would again involve a merger to monopoly for multi-channel video," New Street analyst Blair Levin said.

Less than 10 million housing units remain unpassed by cable, according to an estimate from Ian Olgeirson, an analyst with Kagan, a media research group within S&P Global Market Intelligence.

Even though the issue of a monopoly creation would only impact a small number of people, Levin said it should not be overlooked. While streaming is popular, it is not a substitute for the satellite offerings of DISH and DIRECTV, particularly in rural areas with fewer cable and internet options than urban areas.

The political environment for deals is also more skeptical, Levin noted. "The Biden Administration has branded itself as an instrument of a new attitude about antitrust, one that — in their view — will reverse the mistake of the last 40 years of being too soft on competition issues and allowing deals that should have been blocked."

Reasons for optimism

On the other hand, the recent announcement of Microsoft Corp.'s planned $68.7 billion acquisition of Activision Blizzard Inc. could have positive implications for a DIRECTV/DISH merger, Levin said. He noted that much will depend on how the government defines the entertainment market in which DISH and DIRECTV compete. The government may limit it to video distribution, which would make a deal more difficult, or regulators may consider the entertainment market more broadly, including streaming and even gaming.

"The size of the [Activision] deal, and the amount of time spent playing such games will lead to arguments that all discretionary entertainment should be included in the definition. Even if the government does not accept that argument — and we don't think it will, but a court might — the economic analysis will weaken the government argument that a [satellite] combination will have pricing power sufficient to block the deal," Levin said.

Additionally, DISH and DIRECTV have both seen big subscriber losses in recent years, and those losses are set to continue.

"Given the rapid decline in [satellite] subs, there probably is not a great argument for supporting two satellite services for the long term," said Kagan's Olgeirson.

DIRECTV and DISH still rank among the top five in terms of traditional multichannel subscribers in the U.S. and would jump to No. 1 if combined, Olgeirson said. But he does not expect either to maintain that position for long.

"Slumping demand for standalone satellite video should continue to erode that position, making a better case for a merger for a product perspective over time," he said.

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