Investors are becoming so obsessed with the idea of a DirecTV–Dish Network merger that it seems to be just a matter of time before the companies succumb. Questions about the possibility kept popping up in Dish Network’s quarterly earnings call yesterday. Company watchers “seem to be fixated” on the subject, Brean Capital’s Todd Mitchell says. And execs don’t seem to mind. Last week DirecTV CEO Michael White said he’d “never say never.” And Evercore Partners’ Bryan Kraft says he has “never heard [Dish Network Chairman Charlie Ergen] speak as openly and positively regarding the possibility of a combination with DirecTV” as he did yesterday. The FCC blocked a satellite TV merger in 2002 on the grounds that it would leave many rural subscribers, who don’t have cable, with just one pay TV provider. But Ergen says that the business is “materially different” than it was then. Verizon FiOS and AT&T U-verse serve many markets. “And then of course, you have almost an unlimited number of people now on digital Internet getting into the business, whether it be from Netflix to Hulu to Amazon to everything else that you can do on the Internet,” Ergen says. “And that’s only going to grow.” Later he added that “there’s not any question that putting Dish and DirecTV together makes a lot of sense…. If you just wanted to create short-term value, that would be probably your No. 1 option.”
He’s not ready to jump just yet: Dish has amassed a lot of airwave spectrum rights, but needs more to fulfill his dream to build a fixed wireless broadband service. His efforts to buy Sprint and forge an alliance with Clearwire fell though; he now wants a deal with LightSquared. But if that doesn’t happen and he concludes he has run out of options then “we’re not suicidal about it. We’d exit the wireless business and sell our spectrum and then we’d be a video play.”
Yet Q2 results seemed to confirm the view that prospects for satellite companies have started to dim. Dish surprised analysts by losing 78,000 subscribers in the quarter, partly due to price increases. Last week DirecTV also disappointed by reporting that it lost 84,000 U.S. subscribers. Dish and DirecTV have complained that fast-rising programming costs could make their services more expensive, and harder to sell. Satellite’s competitive position will become weaker if Charter and its largest shareholder, Liberty Media’s John Malone, engineer a merger with Time Warner Cable, Cox, or Cablevision. Last month even Malone said that a Dish-DirecTV deal would make sense for the companies. The satellite business appears to be “entering the first stages of its secular decline phase,” says independent analyst Craig Moffett. Despite Ergen’s wireless vision, “the only way to feel comfortable with a buy rating on Dish is if one believes there will be a merger with DirecTV.”
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