Will a DirecTV-DISH Network Merger Happen?

The chairman of DISH Network has reportedly reached out to the CEO of his satellite rival to discuss teaming up. What could this mean for the industry?

Mar 27, 2014 at 1:18PM

In 2002 federal regulators blocked an attempted merger by satellite television rivals DirecTV (NASDAQ:DTV) and DISH Network (NASDAQ:DISH). Now DISH Chairman Charlie Ergen has approached DirecTV CEO Mike White to put a deal back on the table, Bloomberg reported. .

Though getting the deal approved would likely still be a challenge, the world of cable and satellite television has changed dramatically over the last 12 years. The merging of the companies, which once seemed like it would deliver a clear monopoly that would be bad for consumers, is not as obvious now.

The television landscape is changing

In 2002 Netflix (NASDAQ:NFLX) was a DVD delivery company and many people still had dial-up connections. Satellite television itself was not that far removed from the days when it was a giant dish that looked like something NASA would use. DirecTV and DISH in those days were the only clear options to cable television. For consumers -- who generally only had one cable company to pick from in their community -- competing satellite companies not only kept cable from raising prices too fast, they also battled with each other keeping satellite prices low.

Now customers have more options with even more on the way. Netflix, Hulu, and Amazon's (NASDAQ: AMZN) Prime Video service offer thousands of hours of video for a very low price. Telephone companies offer cable-like options in many communities and a number of networks and content providers are moving closer to offering their services on a digitally streaming basis. In some markets people can also subscribe to Areo, which offers streaming broadcast networks (though the legal system may have something to say about that at some point).

DirecTV and DISH are options to traditional cable, but they are not the only ones any more.

Why should DirectTV and DISH merge now?

It's hard to focus on competing with cable when the two companies must also do battle with each other. The cable landscape is also potentially shrinking with Comcast (NASDAQ:CMCSK) attempting to buy Time Warner's (NYSE:TWX) cable business. If that happens, the combined megacompany will have incredible power to make deals (like the rumored Apple (NASDAQ: AAPL)/Comcast Apple TV deal).

As just one example of how a single satellite entity would better be able to compete, both DISH and DirecTV are currently pursuing launching a streaming-only content product that would not require a satellite connection. Currently both companies are spending money on developing the technology and spending time and resources making partner deals. As one company those efforts could be combined, saving resources and likely leading to a stronger product that would have one less direct competitor.

Will a DirecTV/DISH merger be approved?

While the original DISH/DirecTV deal was shot down, a merger between two competing satellite companies has happened before. Sirius and XM satellite radio companies received both Department of Justice and Federal Communications Commission approval in 2008. Had that not happened it's very possible the companies would have spent themselves out of existence.

That's a reasonable precedent, but the most important one may be a deal that has yet to be approved. If the FCC and the DOJ allow Comcast to buy Time Warner's cable business, it clearly paves the way for DirecTV and DISH. 

If Comcast swallows up Time Warner's cable customers, "the combined company would have 33 million cable subscribers," according to The Washington Post. It would also own NBC and its family of cable channels.

DirecTV has about 20 million subscribers and DISH has 14 million, Bloomberg reported. That's slightly bigger than the combined cable companies, but if one deal gets approved it's hard to see how there would be a basis to veto the other.

Will the DISH/DirecTV deal happen?

"Dish is definitely in play," Am Yong, a New York-based analyst at Macquarie, told Bloomberg. "You can make the case for a Dish-AT&T merger or a Dish-DirecTV merger."

It seems clear that Ergen at least believes that it's worth exploring whether his company needs to be part of a bigger entity to stay competitive. A DISH/DirecTV deal makes sense on the surface but it also has a number of complications. The two companies have vastly different pricing strategies and some differences in their content offerings.

Sirius and XM had similar pricing and managed the different content deals by keeping the consumer-facing products separate. That's a workable scenario, but much like it has been with satellite radio it can lead to customer confusion once they view the two companies as a single entity.

A bigger DISH seems logical, but DirecTV is not the only logical partner. The company could merge (or be acquired by) one of the tel-co companies that offers cable services or by a dark horse like Netflix. DISH has always been the lower-cost satellite provider with its current introductory price at $29.99 a month for 12 months (with all sorts of perks thrown in). Imagine a combined Netflix/DISH that offers a full menu of cable channels through satellite plus a Netflix subscription for $34.99 or thereabouts? Add in DISH's in-development streaming service as an option and you would have a company with a powerful portfolio of products fit to take on cable.

Ergen is right to look and DirecTV may be a match, but it's clearly early in the game and there are a lot of logical partners that would make DISH stronger. 

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Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, DirecTV, and Netflix. The Motley Fool owns shares of Amazon.com, Apple, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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