IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
____________________________________
)
UNITED STATES OF AMERICA )
United States Department of Justice )
Antitrust Division )
1401 H Street, N.W., Suite 8000 )
Washington, DC 20530, )
) CASE NUMBER 1:02CV02138
STATE OF MISSOURI )
Missouri Attorney General’s Office ) JUDGE: Ellen Segal Huvelle
P.O. Box 899 )
Jefferson City, MO 65102, ) DECK TYPE: Antitrust
)
STATE OF ARKANSAS ) DATE STAMP: 10/31/2002
Office of the Attorney General )
Antitrust Division )
323 Center Street, Suite 200 )
Little Rock, Arkansas 72201, )
)
STATE OF CALIFORNIA )
California Department of Justice )
Ronald Reagan Building )
300 S. Spring St., Suite 5N )
Los Angeles, CA 90013, )
)
STATE OF CONNECTICUT )
Office of the Attorney General )
110 Sherman Street )
Hartford, CT 06105, )
)
STATE OF HAWAII )
Department of the Attorney General )
425 Queen Street )
Honolulu, Hawaii 96813, )
)
STATE OF IDAHO )
Office of Attorney General )
P.O. Box 83720 )
Boise, Idaho 83720-0010, )
)
STATE OF ILLINOIS )
Office of the Attorney General )
James R. Thompson Center )
100 W. Randolph Street, 13
th
Floor )
Chicago, IL 60601, )
)
STATE OF IOWA )
Department of Justice )
Hoover Office Building, 2
nd
Floor )
Des Moines, IA 50319, )
)
COMMONWEALTH OF KENTUCKY )
1024 Capital Center Drive )
Frankfort, KY 40601, )
)
STATE OF MAINE )
Office of the Attorney General )
6 State House Station )
Augusta, Maine 04333, )
)
COMMONWEALTH OF )
MASSACHUSETTS )
Office of the Attorney General )
One Ashburton Place, 19th Floor )
Boston, MA 02108, )
)
STATE OF MISSISSIPPI )
P.O. Box 22947 )
Jackson, MI 39225, )
)
STATE OF MONTANA )
P.O. Box 200501 )
Helena, MT 59620-0501, )
)
STATE OF NEVADA )
Office of the Attorney General )
1000 East William Street )
Suite 200 )
Carson City, Nevada 89701, )
)
STATE OF NEW YORK )
Office of the Attorney General )
120 Broadway, 26C )
New York, New York 10271, )
)
STATE OF NORTH CAROLINA )
Department of Justice )
P.O. Box 629 )
Raleigh, NC 27602, )
)
STATE OF NORTH DAKOTA )
Office of the Attorney General )
State Capitol, Department 125 )
600 E. Boulevard Ave. )
Bismarck, ND 58505-0040, )
)
STATE OF OREGON )
Oregon Department of Justice )
1162 Court Street, NE )
Salem, OR 97301, )
)
COMMONWEALTH OF )
PENNSYLVANIA )
Office of Attorney General )
14
th
Floor, Strawberry Square )
Harrisburg, PA 17120, )
)
STATE OF TEXAS )
Office of the Attorney General )
P.O. Box 12548 )
Austin, TX 78711-2548, )
)
STATE OF VERMONT )
Office of the Attorney General )
109 State Street )
Montpelier, VT 05609-1001, )
)
STATE OF WASHINGTON )
900 Fourth Avenue )
Suite 2000 MSTB-14 )
Seattle, WA 98164-1012, )
)
STATE OF WISCONSIN )
Department of Justice )
17 West Main Street )
P.O. Box 7857 )
Madison, WI 53707-7857, )
)
4
DISTRICT OF COLUMBIA )
Corporation Counsel )
441 Fourth Street, NW, Suite 450-N )
Washington, DC 20001, )
)
and )
)
COMMONWEALTH OF PUERTO RICO )
Department of Justice, Antitrust Division )
PO Box 9020192 )
San Juan, Puerto Rico 00902-0192, )
)
)
Plaintiffs, )
)
v. )
)
ECHOSTAR COMMUNICATIONS )
CORP., )
5701 South Santa Fe Drive )
Littleton, CO 80120, )
)
HUGHES ELECTRONICS CORP., )
200 N. Sepulveda Blvd. )
El Segundo, CA 90245, )
)
GENERAL MOTORS CORP. )
300 Renaissance Center )
Detroit, MI 48265-3000, )
)
and )
)
DIRECTV ENTERPRISES INC. )
2230 E. Imperial Highway )
El Segundo, CA 90245 )
)
Defendants. )
____________________________________)
COMPLAINT
5
The United States of America, acting under the direction of the Attorney General of the
United States, and the states of Missouri, Arkansas, California, Connecticut, Hawaii, Idaho,
Illinois, Iowa, Kentucky, Maine, Massachusetts, Mississippi, Montana, Nevada, New York,
North Carolina, North Dakota, Oregon, Pennsylvania, Texas, Vermont, Washington, and
Wisconsin, the District of Columbia, and the Commonwealth of Puerto Rico (“Plaintiff States”),
acting under the direction of their respective Attorneys General, or other authorized officials,
bring this civil action to enjoin the merger of the two most significant direct broadcast satellite
(“DBS”) companies in the United States, Echostar Communications Corp. (“Echostar”) and
Hughes Electronics Corp. (“Hughes”), and allege as follows:
1. Over 80% of households in the United States subscribe to a multichannel video
programming distribution (“MVPD”) service such as DBS or cable. Such services
provide consumers with dozens, and in many cases hundreds, of video channels including
well-known ones like CNN, ESPN, TNT, and HBO.
2. Hughes’ DirecTV DBS service and Echostar’s Dish Network DBS service are the only
two nationwide MVPD services; each offers hundreds of channels to customers equipped
with small satellite receiver dishes. For most U.S. households, Hughes and Echostar are
two of only three providers of MVPD services, with a local cable system providing the
third option.
3. For millions of U.S. households, there is no cable option; for these consumers, Hughes’
DirecTV DBS service and Echostar’s Dish Network DBS service are the only
available
MVPD services.
4. Hughes and Echostar compete vigorously against each other throughout the United States
6
as well as against cable companies in areas that have cable. As a result of the
competition between Hughes and Echostar, customers have benefitted from lower prices
and higher quality service.
5. The proposed acquisition of Hughes by Echostar would cause significant harm to
competition in numerous local markets for MVPD services throughout the country. For
millions of households this merger would create a monopoly. For tens of millions of
households in the United States, this merger would create a duopoly. The combination of
the nation’s only two DBS firms would substantially lessen competition in violation of
Section 7 of the Clayton Act, 15 U.S.C. § 18. For the roughly 95% of U.S. television
households that currently have three or fewer options for MVPD service, this merger
would lead to higher prices and lower service quality than would be the case absent its
consummation. The United States and the Plaintiff States therefore seek an order
permanently enjoining the merger.
I. JURISDICTION AND VENUE
6. This action is filed by the United States under Section 15 of the Clayton Act, 15 U.S.C.
§ 25, to prevent and restrain the Defendants from violating Section 7 of the Clayton Act,
15 U.S.C. § 18.
7. The Plaintiff States bring this action under Section 16 of the Clayton Act, 15 U.S.C. § 26,
to prevent and restrain the violation by the Defendants of Section 7 of the Clayton Act,
15 U.S.C. § 18. The Plaintiff States, by and through their respective Attorneys General,
or other authorized officials, bring this action in their sovereign capacities and as parens
patriae on behalf of the citizens, general welfare and economy of each of their states.
7
8. Echostar, Hughes, General Motors Corp. (“GM”), and DirecTV Enterprises, Inc.
(“DirecTV”) are engaged in interstate commerce and in activities substantially affecting
interstate commerce. Echostar and Hughes market and sell MVPD equipment and
services throughout the United States. Echostar and Hughes sell their equipment and
MVPD services directly to consumers, and also engage in commerce with third party
distributors, retailers, and installers across state lines. Echostar's and Hughes' sales and
commercial relationships in the United States, and in each of the Plaintiff States,
represent a regular, continuous and substantial flow of interstate commerce, and have had
a substantial effect upon interstate commerce as well as commerce in each of the Plaintiff
States. The Court has jurisdiction over this action pursuant to Sections 15 and 16 of the
Clayton Act, 15 U.S.C. §§ 25, 26, and 28 U.S.C. §§ 1331, 1337.
9. Echostar, Hughes, GM, and DirecTV transact business and are found in the District of
Columbia. Venue is proper under Section 12 of the Clayton Act, 15 U.S.C. § 22, and 28
U.S.C. § 1391(c).
II. THE DEFENDANTS AND THE TRANSACTION
10. Echostar is a corporation organized and existing under the laws of the state of Nevada.
Its Chairman and CEO, Charles W. Ergen, is also its largest shareholder, through a
family trust owning a 49.8% equity interest and a 90.8% voting interest. Echostar
launched its Dish Network DBS service (“DISH”) on March 16, 1996. In the six years
since it began offering DBS service, Echostar has grown to roughly 7.5 million
subscribers (as of June 30, 2002). In 2001, it generated in excess of $4 billion in
revenue.
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11. Hughes is a corporation organized and existing under the laws of the state of Delaware.
It is a wholly-owned subsidiary of GM, a corporation also organized and existing under
the laws of the state of Delaware. Hughes owns all of the issued and outstanding stock of
DirecTV, another corporation organized and existing under the laws of the state of
Delaware, which operates the DirecTV DBS service (“DTV”). The DTV service was
launched on June 17, 1994. In the eight years since then, DTV has grown to 10.9 million
subscribers (as of September 30, 2002). Hughes also operates the nation’s largest high-
speed, satellite-based Internet access service under the DirecPC and Direcway brands.
Within the next year or so, Hughes plans to launch a next-generation satellite Internet
service called Spaceway. In addition, Hughes operates DSL broadband Internet service
under the DirecTV DSL brand. In 2001, Hughes generated $8.2 billion in revenue, of
which $5.6 billion was generated by its U.S. DTV operations.
12. Pursuant to an Agreement and Plan of Merger dated October 28, 2001, as well as several
related agreements, GM agreed to sell Hughes, the parent of DirecTV, to Echostar in a
deal that was then valued at roughly $26 billion in cash and stock. The resulting merged
entity would assume the Echostar corporate name and would use the “DirecTV” brand
for its DBS service offering. Charles Ergen would be Chairman and CEO of the newly
merged company and, through a family trust, would hold approximately 16.7% of the
total shares of outstanding common stock (and an approximate 39% voting interest).
13. On December 3, 2001, the Defendants filed an application for the transfer of control of
various licenses issued by the Federal Communications Commission (“FCC”) that would
be necessary for the merged firm to conduct its business. Unless and until their FCC
9
application is granted, the Defendants cannot consummate the merger. On October 10,
2002, the FCC, citing substantial competitive concerns with the transaction, announced
that it was noticing the license transfer application for a hearing. This hearing is not
expected to be completed for a minimum of several months.
III. THE RELEVANT MARKET
A. Historical Background and Description of the Product
14. Satellite television service provided directly to the home has been available since the late
1970s. The first such services were provided in a range of the electromagnetic spectrum
known as “C-band.” The low-power C-band signal requires large receiving dishes
measuring four to eight feet in diameter. The size and cost of the dishes has been a
barrier to widespread marketplace acceptance of C-band service. Use of C-band service
has been declining substantially in recent years as existing customers replace their larger
dishes with smaller, less expensive DBS equipment.
15. The next satellite TV technology to emerge after C-band was medium-power service. A
medium-power service requires a smaller dish than does C-band service, but a
significantly larger receiving dish than those currently used by DTV and DISH. A joint
venture of several of the nation’s largest cable companies known as Primestar launched
the only commercially significant mass market medium-power service in 1991. Hughes
purchased Primestar in 1999, converted its customers to its DTV DBS service, and shut
down the medium-power service. No other commercially significant medium-power
service has ever been launched in the United States, nor is any such launch anticipated
today.
10
16. The current generation of DBS services--those operated by Hughes (DTV) and Echostar
(DISH)--are typically referred to as “high-power” services. Receiving dishes for these
DBS services are significantly smaller than the medium-power dishes, typically 18-24
inches in diameter. As with the older satellite services, to subscribe to a DBS service a
consumer must also acquire a set-top box that decodes the signal from the antenna and
displays it on the customer’s television set.
17. The spectrum allocated for high-power DBS service is limited by international treaties,
and the FCC is responsible for assigning all U.S. satellite orbital positions and
frequencies. Only three orbital slots have signal footprints that allow a high-power DBS
satellite to transmit programming to the entire continental United States (excluding
Alaska). These three slots are referred to as full-CONUS slots. Thirty-two transponder
frequencies are available at each orbital slot; thus, in total there are 96 full-CONUS
frequencies available. Each frequency can carry multiple channels (e.g., HBO, ESPN).
Due to technological improvements, the number of channels that can be carried per
frequency has increased substantially over the years. Although high-power DBS service
can also be offered from non-full-CONUS slots, these slots are substantially less
desirable for a mass-market DBS service because they do not cover the entire continental
United States.
18. In June 1994, Hughes and United States Satellite Broadcasting, Inc. (“USSB”) began
offering the nation’s first high-power DBS service utilizing the 32 frequencies they
controlled. DTV signed up nearly one million subscribers in its first year. As part of a
1994 contractual arrangement, DTV is exclusively promoted and sold by the National
11
Rural Telecommunications Cooperative (“NRTC”) in certain rural regions of the country.
Pegasus Communications Corp. is the NRTC’s largest affiliate reselling DTV.
19. In March 1996, Echostar began offering its DBS service, DISH, utilizing the 24
frequencies it controlled.
20. Both Hughes and Echostar were successful with their respective DBS services,
experiencing steady and consistent growth. By January 1998, DTV had more than three
million subscribers, and DISH had more than one million subscribers.
21. As of the beginning of 1998, five companies controlled the 96 full-CONUS DBS
frequencies: Hughes/DirecTV, Echostar, USSB, ASkyB (a joint venture of
MCI/Worldcom and News Corp.), and Tempo Satellite, Inc. (“Tempo”). Over the next
18 months, Hughes bought USSB and Tempo, and Echostar acquired the ASkyB
licenses. These transactions substantially increased the number of full-CONUS
frequencies available to Hughes, and more than doubled the number of full-CONUS
frequencies available to Echostar. By mid-1999, all 96 full-CONUS slots available for
DBS service in the United States were in the hands of just two firms--Hughes (46) and
Echostar (50)--a situation that continues to this day.
22. By late 1999, DISH had grown to more than three million subscribers, and DTV had
grown to more than 5.5 million. Until late 1999, both DBS firms were effectively
precluded by legal obstacles from offering local broadcast channels to their subscribers
via their DBS satellites. Thus, if DBS customers wanted to receive local stations, they
either had to receive them via broadcast antennas or from their cable company. In
November 1999, the Satellite Home Viewer Improvement Act was signed into law,
eliminating the legal obstacles to the provision of local broadcast stations via satellite.
12
Within days, Hughes and Echostar began offering local broadcast stations in the largest
television markets in the United States, providing further impetus to their competitive
success.
23. The past few years have seen continued substantial growth for both DBS firms. They
have continued to add subscribers at an average rate of more than one million a year.
Indeed, in the year or so since the proposed merger was announced, DISH alone has
added more than one million additional net subscribers. Today, DTV has more than 10.9
million subscribers, and DISH has more than 7.5 million. Hughes and Echostar each has
grown to become among the largest five MVPD firms in the United States.
B. Relevant Product Market
24. The relevant product market affected by this transaction is multichannel video
programming distribution (“MVPD”)--a term frequently used in the industry and by the
FCC. Although the programming can in theory be delivered via a number of distinct
methods, the only firms to experience a significant degree of commercial success are
those distributing programming via digital or analog cable, or direct broadcast satellite.
25. Among the characteristics of an MVPD service are: (1) a large number of channels,
typically between several dozen and several hundred; (2) programming not available
“over-the-air” including a mixture of “basic” services (e.g., ESPN, CNN, USA, TNT), as
well as premium services (e.g. HBO, Showtime, Cinemax); and (3) a monthly
subscription fee for programming.
26. MVPD providers typically offer a wide variety of “tiered” programming packages and “a
la carte” services. These tiers generally include: (1) one or more “basic” and/or
“expanded basic” packages which include a variety of “core” programming channels
13
available for a monthly fee; and (2) “premium” or “pay” services that include networks
available on a per-service basis such as HBO and Showtime. Many MVPD providers
offer additional services such as electronic program guides and pay-per-view events for
which viewers can see a recent movie or live sporting event by paying a one-time fee.
Cable firms typically include local over-the-air television signals as part of their “basic”
offering. For the two DBS firms, local broadcast channels are available via satellite to a
majority of households in the country for an additional monthly fee.
27. Cable television and DBS are both MVPD products. Although the programming services
are delivered via different technologies, and there are important differences between
cable and DBS, consumers view the services as similar and to some extent substitutable.
Cable and DBS compete by offering similar packages of basic and premium channels for
a monthly subscription fee. Cable is differentiated: many systems are “digital” systems
(or are in the process of converting to digital) with hundreds of channels that make them
good substitutes for DBS, whereas others are older “analog” systems that are more
distant substitutes.
28. Standard over-the-air broadcast television does not include the variety of programming
services that are available to MVPD subscribers: it does not provide nearly the number
of channels; it does not provide access to popular services such as ESPN, CNN, TNT;
and it does not permit access to premium services such as HBO or Showtime. Thus, most
consumers do not consider broadcast television an acceptable substitute for cable and
DBS services. Accordingly, even though they can receive over-the-air stations for free,
customers are willing to pay a significant sum--several hundred dollars a year--for
MVPD service. Indeed, over the past several years, despite the fact that prices for
14
MVPD service, particularly cable, have increased significantly, the percentage of
households subscribing to such service has actually also increased. The FCC reported
that as of June 2001, over 85 million U.S. households (more than 80% of total
households) subscribed to an MVPD service. In the event of a small but significant price
increase by cable and DBS providers of MVPD, the increase would not be made
unprofitable by customers switching to over-the-air television.
29. C-band satellite services are not an acceptable substitute for cable or DBS for the vast
majority of American consumers due to the size of the necessary equipment (four to eight
feet in diameter) and cost of owning C-band systems. C-band subscribership has
declined from a peak of 2.3 million in 1995 to around 750,000, and it is still shrinking.
During roughly the same time frame, DBS subscribership has gone from under one
million to over 18 million. C-band is not a significant competitive constraint on cable or
DBS today: a small but significant price increase for cable and DBS services would not
cause a sufficient number of customers to switch to C-band so as to make the increase
unprofitable.
C. Relevant Geographic Market
30. Consumers purchasing MVPD services select from among those companies that can offer
such services directly to the consumer’s home. Because DTV and DISH both are
satellite-based services operating from full-CONUS satellite locations, they can reach
any customer in the continental United States with an unobstructed view of the satellite.
However, cable system operators generally must obtain a cable franchise from local,
municipal, or state authorities in order to construct and operate a cable system in a
specific area and, in fact, build wires out to the homes in that area. Consumers cannot
15
purchase MVPD services from a cable firm operating outside their area because that firm
does not have the authority to run wires to the consumer’s home. Thus, although the set
of MVPD providers able to offer service to individual consumers’ residences generally is
the same within each local community, it differs from one local community to another.
For ease of analysis, therefore, it is useful to aggregate consumers who face the same
competitive choices in MVPD providers, for example by aggregating customers in a
county or other jurisdiction served by the same cable system, or by no cable system.
31. Thus, the United States comprises numerous local geographic markets for MVPD
service, each consisting of a community whose members face the same competitive
choices. In each, customers can choose from either DTV or DISH. In most markets, a
local cable operator provides a third option. In a very few markets representing no more
than 5% of U.S. households, customers can choose to buy from a fourth provider.
Customers cannot choose to purchase service from a cable operator who does not serve
their area.
IV. MARKET CONCENTRATION
32. There are millions of households in the United States for which DTV and DISH are the
only competitive MVPD options. In the markets without cable, the proposed merger
would reduce the number of competitors from two to one and create an MVPD
monopoly.
33. In most of the rest of the United States, DTV, DISH, and the incumbent cable company
are the only MVPD options. In many of these markets, the cable system is a modern
“digital” system with hundreds of channels and is therefore a good substitute for DTV
and DISH; however, many are older “analog” systems that are more distant substitutes
16
for the services offered by the DBS firms because they offer far fewer channels and
services, as well as inferior picture and audio quality. The vast majority of the
population of the United States lives in geographic areas that are served by an incumbent
cable system, but no second cable provider. In these markets, the proposed merger would
reduce the number of competitors from three to two and create an MVPD duopoly.
34. The markets for MVPD services in the United States are highly concentrated and would
become dramatically more so as a result of the proposed merger according to the HHI,
the standard measure of market concentration (defined and explained in Appendix A). In
the merger-to-monopoly markets described in paragraph 32, the HHI would increase to
10000, the maximum possible. Although shares and HHIs vary in the merger-to-duopoly
areas described in paragraph 33, typically the merger would result in an increase in the
HHI of more than 100 points to a level greater than 6000. Moreover, given that DTV and
DISH are continuing to increase their market shares steadily at the expense of cable,
current shares understate their competitive significance. Even more important, because
the two DBS firms are such close substitutes for each other, they are major constraints on
each other’s behavior to an extent not adequately captured by their market shares alone in
the MVPD markets.
35. In a few local markets, a second firm has been granted authority to construct its own
cable system to compete with the incumbent cable provider. These “overbuilders”
literally build a second wireline cable system over the incumbent’s franchise territory or,
more commonly, a portion thereof. Overbuilding has been limited to a small number of
markets where an unusual combination of population density, demographics, topography,
and other factors make such a strategy feasible. Similarly, although there are a handful of
17
MVPD systems that use alternate technologies, e.g., multichannel multipoint distribution
service (“MMDS”), sometimes known as wireless cable; or very high speed digital
subscriber line (“VDSL”) service which uses telephone lines; these are only available in
a handful of markets to a total of several hundred thousand subscribers. Thus,
households where there is a competitive alternative to DBS or incumbent cable amount to
no more than approximately 5% of U.S. households.
36. For millions of American households, the proposed merger is a merger-to-monopoly,
reducing the number of MVPD competitors from two to one. For tens of millions of
households--most of the United States--this is a merger-to-duopoly, reducing the number
of MVPD competitors from three to two.
V. ANTICOMPETITIVE EFFECTS
A. Monopoly Markets
37. In the geographic markets where DTV and DISH are the only two MVPD options, this
merger would create a monopoly and eliminate any effective competition. Because the
two DBS services are the only competitive option for MVPD service in uncabled areas, a
disproportionately large percentage of DBS customers--perhaps in excess of 30%
according to the companies’ own internal estimates--are in areas that do not have cable.
Given that such a large portion of its existing customer base would be in areas with no
competition post-merger, the merged firm would have a substantial incentive to charge
different prices, or provide different quality of service, to these customers. Moreover, the
merged firm would have the ability to discriminate against these customers, e.g., by
running promotions for which these customers are not eligible, or by special offers
available only to customers who switch from cable, or who are threatening to switch to
18
cable. Thus, as a result of this merger millions of American consumers would be
confronted by a monopolist provider of MVPD service which would have the incentive
and ability to charge higher prices and provide lower service quality than would exist
without the merger. As Echostar itself noted in a court filing in 2000: “Millions of
potential DBS customers . . . live in areas that do not have access to cable. For these
millions of customers and potential customers, if there is no competition between DTV
and DISH Network, there is no competition at all.”
B. Duopoly Markets
38. In the geographic markets where DTV and DISH are two of three MVPD services, i.e.,
areas in which there is also an incumbent cable company, this merger would create a
duopoly and substantially lessen competition to the detriment of consumers.
39. Because Hughes and Echostar are the only two facilities-based DBS services, they offer
products that are closer to each other in character and pricing than either is to cable. As
Echostar itself acknowledged in papers filed in a 2000 lawsuit against DirecTV,
“Echostar is DIRECTV’s closest competitor.”
40. As a result of the closeness of their respective DBS services, Hughes and Echostar
monitor each other's behavior and competitively react to each other. Although Hughes
and Echostar also compete against cable, the similarity between their DTV and DISH
services results in important competition between them that produces benefits to
consumers and that would be lost as a result of this merger.
41. Indeed, because most DBS customers switch from cable, much of the competition
between Hughes and Echostar is to attract the customers switching from cable. If this
merger were to proceed, this competition--the competition between Hughes and
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Echostar--would be lost, and consumers would face higher prices and lower quality than
they would otherwise.
42. Hughes and Echostar compete on a broad array of price and quality characteristics,
including programming pricing, programming packages, acquisition of channels, retailer
compensation, equipment pricing, installation pricing, local broadcast channels, and
targeted promotions. Echostar itself acknowledged in papers filed in U.S. District Court
in 2000, “DIRECTV and Echostar react primarily to each other when setting equipment
and service prices.” Competition between Hughes and Echostar has taken the form of
measuring themselves against one another, looking to each other when making price and
quality decisions, seeking to have a competitive advantage over each other (or at least to
maintain approximate parity), and imitating competitive improvements that the other has
initiated. Consumers have benefitted from competition between the two that would be
lost after the merger.
43. Competition to Offer Attractive Programming Prices: Echostar and Hughes compete to
offer customers the most attractively priced programming, and this competition has
restrained them from increasing prices, even as many cable prices have increased. Price
competition between Hughes and Echostar keeps prices low not only for basic
programming packages, but also for additional programming, such as pay-per-view
movies and foreign language channels.
44. Competition to Offer Attractive Programming Packages
: Both Echostar and Hughes sell
several programming packages (a bundle of channels for a single price). A key
competitive factor for consumers is the content of the packages -- how many channels,
and which ones. Competition between Echostar and Hughes has been a significant factor
20
in each firm’s decisions to make its packages more attractive to consumers by adding
channels, and consumers have benefitted from this competition.
45. Competition to Offer Programming Variety: Echostar and Hughes compete to obtain
channels to put into their programming offerings so as to make them available to
consumers. This competition benefits consumers.
46. Competition to Make Technological Improvements in Channel Capacity: Competition
between Hughes and Echostar pushes both firms to make technological improvements so
that they can offer more channels to consumers. Both have dramatically improved
channel capacity over the past five years, and each is continuing to work on additional
technological improvements.
47. Competition to Make Low Equipment Prices Available to Consumers: Customers can
obtain equipment for DBS service either directly from Hughes and Echostar or through
third-party retailers who sell the service and equipment. Hughes and Echostar compete
to offer retailers attractive financial subsidies for equipment sales, and retailers
consequently can and do make low prices available to consumers. Hughes and Echostar
closely track each other’s equipment pricing and respond to each other’s promotions.
Since Hughes first launched its service, equipment prices to consumers have dropped
dramatically from several hundred dollars to near zero, because Hughes and Echostar,
largely driven by competition between them, have increasingly subsidized its cost.
48. Competition on Installation Pricing
: When Hughes launched its DBS service in 1994,
users were faced with either installing a satellite dish themselves or paying for an
expensive professional installation. Over time, competition between Echostar and
Hughes has forced both firms routinely to offer free professional installation to
21
customers.
49. Competition to Provide Local Channels: Competition between Echostar and Hughes has
led to the dramatically increased availability of local channels via satellite over the past
three years. Initially, Hughes did not offer local channels via satellite and had no plans to
do so. But when Echostar announced that it would offer local broadcast channels in
certain markets via satellite, Hughes changed its approach. Hughes embarked on an
aggressive strategy to offer local broadcast channels via satellite, constructing two state-
of-the-art spot-beam satellites designed to provide local signals in up to 103 local
markets, accounting for roughly 85% of U.S. households. (The second is scheduled for
launch late next year.) Competition between Hughes and Echostar also affects the firms’
decisions on whether and when to offer local channels in additional markets.
50. Competition Targeting Each Other’s Customers: Both Echostar and Hughes have
targeted the other’s customers with specific promotions that offer more attractive pricing
or more attractive terms for DBS service.
51. Thus, competition between Hughes and Echostar occurs across a broad array of product
characteristics and prices. If the two firms merge, the firms will not face the competitive
constraint that has led to these competitive benefits to customers. As Echostar CEO
Charles Ergen noted in an e-mail concerning Alaska, where DTV does not have a strong
signal: “[r]ealize we have signal in Alaska and DTV doesn’t have much, we don’t have
competition there. We don’t need to be as aggressive.” If this merger were to go
forward, a substantial amount of competition--the competition between Hughes and
Echostar--would be lost and the merged firm would not “need to be as aggressive.”
52. In addition, because this merger would reduce the number of MVPD competitors from
22
three to two in many relevant geographic markets, it would facilitate tacit coordination
and substantially increase the likelihood of increased interdependent pricing between the
merged entity and incumbent cable providers.
53. If Hughes and Echostar were to merge, each major cable company would compete with
the merged DBS firm, but no cable company would compete significantly with any other
major cable company. Such a structure increases the risk of coordinated behavior.
54. Both Hughes and Echostar are capable of targeting, and have in the past targeted specific
markets with intensified marketing initiatives and promotional pricing. A cable company
that departed from a coordinated pricing scheme could be “targeted” by the merged DBS
firm to discipline them, discourage cheating, and help enforce a collusive scheme.
55. The merger of Hughes and Echostar, by increasing substantially the risk of coordinated
behavior in MVPD markets, would likely lead to higher prices and lower service quality-
-both for the merged firm and for the incumbent cable companies interacting with the
merged firm--than would exist absent the merger.
C. Lack of Countervailing Factors
56. Entry or expansion on a widespread scale will not be timely, likely, or sufficient to undo
the competitive harm that would likely result from the proposed merger.
57. Although the past decade has seen much interest and discussion regarding new
alternatives to DBS and cable for MVPD, these have almost universally failed to
materialize. Cable overbuilders have, by far, been the most successful of the alternatives
to incumbent cable and DBS. But even they serve less than 5% of U.S. households, and
due to the inherent difficulties of an overbuild strategy many overbuilders have either
abandoned plans to enter new markets or curtailed expansion significantly. Alternative
23
MVPD technologies such as MMDS, VDSL, etc., have serious drawbacks and therefore
have thus far failed to have much marketplace impact. It is highly unlikely that the
percentage of households served by overbuilders or any other alternative to incumbent
cable or DBS will increase substantially in the foreseeable future, even if MVPD prices
were to increase 5-10%.
58. Entry by a new DBS entrant would be extremely difficult, time-consuming, and
expensive. Because Hughes and Echostar control all the frequencies for the three DBS
slots that cover the entire continental United States, as well as most of the ones which
cover a part of the United States, it is unlikely that any other firm could offer a
competitive, mass-market, nationwide service. Even assuming a DBS entrant could
overcome the lack of frequencies, it would face hundreds of millions, if not billions, of
dollars in costs to design, construct, and launch satellites, design and manufacture set-top
boxes and dishes, negotiate programming contracts, and create a distribution and
installation network. If an entrant were to overcome these obstacles, it would likely be
years, if ever, before it became a strong, effective competitor to the merged firm and
incumbent cable systems. As Echostar itself stated in a court filing in 2000, “It is very
unlikely that competitors, other than DISH Network and DTV, will enter the DBS service
market in the United States because of the significant cost of entry into the marketplace.”
59. Although Hughes and Echostar assert that the merger would produce substantial
efficiencies, they cannot demonstrate merger-specific efficiencies that would be
sufficient to reverse the merger's anticompetitive effect.
VI. VIOLATION ALLEGED
60. The United States and the Plaintiff States hereby incorporate paragraphs 1 through 59.
24
61. Pursuant to an Agreement and Plan of Merger dated October 28, 2001, Echostar and
Hughes intend to merge their businesses.
62. The effect of the proposed acquisition of Hughes by Echostar would be to lessen
competition substantially in interstate trade and commerce in numerous geographic
markets for MVPD service accounting for roughly 95% of the U.S. population in
violation of Section 7 of the Clayton Act, 15 U.S.C. § 18.
63. This merger threatens loss or damage to the general welfare and economies of each of the
Plaintiff States, and to the citizens of each of the Plaintiff States. Plaintiff States and
their citizens will be subject to a continuing and substantial threat of irreparable injury to
the general welfare and economy, and to competition, in their respective jurisdictions
unless the Defendants are enjoined from carrying out this merger, or from entering into or
carrying out any agreement, understanding, or plan by which Echostar would merge with
or acquire Hughes, its capital stock or any of its assets.
64. The transaction would likely have the following effects, among others:
(a) competition in the development, provision, and sale of MVPD service in each of the
relevant geographic markets would be eliminated or substantially lessened;
(b) actual and future competition between Echostar and Hughes, and between these
companies and local cable firms, in development, provision, and sale of MVPD
service would be eliminated or substantially lessened;
(c) prices for MVPD service would likely increase to levels above those that would
prevail absent the merger; and
(d) innovation and quality of MVPD service would likely decrease to levels below those
that would prevail absent the merger.
25
PRAYER FOR RELIEF
The United States and the Plaintiff States request:
1. That the proposed acquisition be adjudged to violate Section 7 of the Clayton Act, 15
U.S.C. §18;
2. That the Defendants be permanently enjoined and restrained from carrying out the
Agreement and Plan of Merger dated October 28, 2001, or from entering into or carrying
out any agreement, understanding, or plan by which Echostar would merge with or
acquire Hughes, its capital stock or any of its assets;
3. That the United States and the Plaintiff States be awarded costs of this action; and
4. That Plaintiffs have such other relief as the Court may deem just and proper.
Respectfully submitted,
FOR PLAINTIFF UNITED STATES:
/s/ /s/
Charles A. James Lawrence M. Frankel
Assistant Attorney General (D.C. Bar No. 441532)
/s/
Claude F. Scott, Jr.*
/s/ (D.C. Bar No. 414906)
R. Hewitt Pate Benjamin D. Brown
Deputy Assistant Attorney General Hillary B. Burchuk
Michael D. Chaleff
Craig W. Conrath
F. Patrick Hallagan
Matthew C. Hammond
/s/ Ketan P. Jhaveri
John M. Lynch
Constance K. Robinson Lorenzo McRae, II
Director of Operations John R. Read
Philip J. Sauntry, Jr.
Jodi A. Smith
/s/ Conrad J. Smucker
Kevin L. Yingling
Nancy M. Goodman Frederick S. Young
Chief
Laury E. Bobbish Trial Attorneys
Assistant Chief U.S. Department of Justice
Telecommunications & Media Section Antitrust Division
Telecommunications & Media Section
1401 H Street, NW, Suite 8000
Washington, D.C. 20530
DATED: October 31, 2002
* Counsel of Record
27
MARK PRYOR
Attorney General of Arkansas
/s/
____________________________________
Teresa Brown
State Bar No. 84113
Senior Assistant Attorney General
Antitrust Division
Office of the Attorney General
323 Center St., Ste. 200
Little Rock, AR 72201
501/682-3561
501/682-8118 (Facsimile)
BILL LOCKYER,
Attorney General of California
PETER SIGGINS.
Chief Deputy Assistant Attorney
RICHARD FRANK,
Chief Assistant Attorney General
KATHLEEN FOOTE,
Acting Senior Assistant Attorney General
BARBARA MOTZ,
Supervising Deputy Attorney General
PATRICIA L. NAGLER,
Deputy Attorney General
By: /s/
_________________________________
PATRICIA L. NAGLER
Deputy Attorney General
CA Bar No. 101150
Office of the Attorney General for the State
of California
300 South Spring Street, Suite 5000
Los Angeles, CA 90013
Tel: 213-620-6411
Fax: 213-620-6005
/s/
____________________________________
RICHARD BLUMENTHAL
Attorney General
State of Connecticut
/s/
____________________________________
STEVEN M. RUTSTEIN
Assistant Attorney General
Department Head, Antitrust Department
ROGER F. REYNOLDS
Assistant Attorney General
Antitrust Department
110 Sherman Street
Hartford, CT 06105
Tel: (860) 808-5540
Fax: (860) 808-5585
/s/
____________________________________
EARL I. ANZAI
Attorney General
State of Hawaii
/s/
____________________________________
RODNEY I. KIMURA
HI Bar #2734
MICHAEL L. MEANY
HI Bar #2750
Deputy Attorneys General
Department of the Attorney General
State of Hawaii
425 Queen Street
Honolulu, Hawaii 96813
Tel: 808-586-1180
Fax: 808-586-1205
ALAN G. LANCE
ATTORNEY GENERAL
28
STATE OF IDAHO
/s/
____________________________________
BRETT T. DeLANGE
Idaho Bar No. 3628
Deputy Attorney General
Consumer Protection Unit
Office of the Attorney General
Len B. Jordan Building
650 W. State St., Lower Level
P.O. Box 83720
Boise, Idaho 83720-0010
Telephone: (208) 334-2424
FAX: (208) 334-2830
STATE OF ILLINOIS
JIM RYAN
Attorney General
/s/
____________________________________
ROBERT W. PRATT
IL ARDC NO. 2247593
Chief, Antitrust Bureau
State of Illinois
100 W. Randolph Street
Chicago, IL 60601
Tel: 312-814-3722
Fax: 312-814-1154
THOMAS J. MILLER
Attorney General
State of Iowa
/s/
____________________________________
JOHN F. DWYER
Attorney
ALBERT B. CHANDLER III
ATTORNEY GENERAL
State of Kentucky
/s/
____________________________________
David R. Vandeventer
Assistant Attorney General
Consumer Protection Division
1024 Capital Center Dr.
Frankfort, KY 40601
(502) 696-5389
/s/
____________________________________
G. STEVEN ROWE
Attorney General
State of Maine
/s/
____________________________________
FRANCES ACKERMAN
ME Bar No. 2125
LINDA J. CONTI
ME Bar. 3638
Assistant Attorneys General
State of Maine
Office of the Maine Attorney General
6 State House Station
Augusta, Maine 04333-0006
Tel.: 207-626-8800
Fax: 207-624-7730
THOMAS F. REILLY
Attorney General
Commonwealth of Massachusetts
/s/
____________________________________
DAVID W. MONAHAN
Mass. BBO #551768
Assistant Attorney General
Consumer Protection & Antitrust Division
Office of the Attorney General
One Ashburton Place
Boston, MA 02108
(617) 727-2200 ext. 2954
/s/
29
____________________________________
MIKE MOORE
Attorney General
State of Mississippi
/s/
____________________________________
SCOTT A. JOHNSON
MS Bar #9592
Special Assistant Attorney General
State of Mississippi
P.O. Box 22947
Jackson, MS 39225
Tel: 601-359-4230
Fax: 601-359-4231
/s/
____________________________________
JEREMIAH H. (JAY) NIXON
Attorney General
State of Missouri
/s/
____________________________________
ANNE E. SCHNEIDER
MO Bar #35479
Assistant Attorney General
State of Missouri
P.O. Box 899
Jefferson City, MO 65102
Tel: 573-751-8455
Fax: 573-751-7948
/s/
____________________________________
MIKE McGRATH
Attorney General
State of Montana
Justice Building
215 N. Sanders
P.O. Box 201401
Helena, MT 59620-1401
Tel: 406)444-2026
Fax: (406)444-3549
/s/
____________________________________
CHRISTOPHER VAN DYCK
Senior Deputy Attorney General
State of Nevada
ROY COOPER
Attorney General
State of North Carolina
/s/
____________________________________
K. D. Sturgis
Assistant Attorney General
N.C. State Bar #9486
North Carolina Department of Justice
P.O. Box 629
Raleigh, NC 27602
Tel. (919)716-6000
Fax (919)716-6050
State of North Dakota
Wayne Stenehjem
30
Attorney General
BY; /s/
____________________________________
Parrell D. Grossman, ID No. 04684
Assistant Attorney General
Director, Consumer Protection &
Antitrust Div.
Todd A. Sattler, ID No. 05718
Assistant Attorney General
Office of Attorney General
600 E. Boulevard Ave Dept 125
Bismarck, ND 58505-0040
(701) 328-2811
/s/
____________________________________
ELIOT SPITZER
Attorney General
State of New York
Jay Himes
Bureau Chief
Antitrust Bureau
State of New York
Richard E. Grimm
James Yoon
Assistant Attorneys General
Antitrust Bureau
120 Broadway, 26C
New York, New York 10271
Tel:(212) 416-8282,(212)416-8280
Fax: (212) 416-6015
/s/
____________________________________
HARDY MYERS
Attorney General
State of Oregon, by
PETER D. SHEPHERD
Deputy Attorney General
/s/
____________________________________
ANDREW AUBERTINE
Assistant Attorney General
State of Oregon
D. MICHAEL FISHER
ATTORNEY GENERAL
Commonwealth of Pennsylvania
By: /s/
____________________________________
James A. Donahue, III
Chief Deputy Attorney General
Antitrust Section
PA Bar No.: 42624
Joseph S. Betsko
Deputy Attorney General
Antitrust Section
PA Bar No.: 82620
14th Floor, Strawberry Square
Harrisburg, PA 17120
(717) 787-4530
Fax:(717 ) 705-7110
STATE OF TEXAS
JOHN CORNYN
Attorney General of Texas
31
HOWARD G. BALDWIN, JR.
First Assistant Attorney General
JEFFREY S. BOYD
Deputy Attorney General for Litigation
PAUL D. CARMONA
Assistant Attorney General
Chief, Consumer Protection Division
/s/
____________________________________
MARK TOBEY
Assistant Attorney General
Chief, Antitrust Section
State Bar No. 20082960
KIM VAN WINKLE
Assistant Attorney General
State Bar No. 24003104
Office of the Attorney General
P.O. Box 12548
Austin, Texas 78711-2548
512/463-2185
512/320-0975 (Facsimile)
WILLIAM H. SORRELL
Attorney General
State of Vermont
/s/
___________________________________
JULIE BRILL
VT Federal Bar #000-56-0639
Assistant Attorney General
State of Vermont
Office of the Attorney General
109 State Street
Montpelier, Vermont
05609-1001
802-828-3171 telephone
802-828-2154 fax
CHRISTINE O. GREGOIRE
Attorney General
TINA E. KONDO, WSBA #12101
Sr. Assistant Attorney General
/s/
___________________________________
Brady Johnson, WSBA #21732
Assistant Attorney General
Antitrust Division
Attorneys for State of Washington
Tel: 206-389-2848
Fax: 206-587-5636
STATE OF WISCONSIN
JAMES E. DOYLE
Attorney General
/s/
____________________________________
DAVID J. GILLES
Assistant Attorney General
Tel No. (608)266-1792
INTERIM CORPORATION COUNSEL
ARABELLA W. TEAL
CORPORATION COUNSEL OF THE
DISTRICT OF COLUMBIA
By: /s/
____________________________________
32
Don Allen Resnikoff
Assistant Corporation Counsel
441 4th Street, N.W., Suite 450-N
Washington, D.C. 20001
(202) 727-4170
JOSE G. DIAZ TEJERA
ASSISTANT ATTORNEY GENERAL
FOR THE ANTITRUST DIVISION
COMMONWEALTH OF PUERTO RICO
Department of Justice
PO Box 9020192
San Juan, Puerto Rico 00902-0192
/s/
____________________________________
DAVID GIL DE RUBIO
SPECIAL PROSECUTOR FOR THE
ANTITRUST DIVISION
Department of Justice
Phone No. (787) 721-2900 Ext. 2219
Fax No. (787) 725-2475
E-mail: [email protected]
APPENDIX A
Herfindahl-Hirschman Index
“HHI” means the Herfindahl-Hirschman Index, a commonly accepted measure of market
concentration. It is calculated by squaring the market share of each firm competing in the market
and then summing the resulting numbers. For example, for a market consisting of four firms
with shares of 30%, 30%, 20%, and 20%, the HHI is 2600 (30
2
+ 30
2
+20
2
+ 20
2
= 2600).
(Note: Throughout the Complaint, market share percentages have been rounded to the nearest
whole number, but HHIs have been estimated using unrounded percentages in order to
accurately reflect the concentration of the various markets.) The HHI takes into account the
relative size distribution of the firms in a market and approaches zero when a market consists of
a large number of small firms. The HHI increases both as the number of firms in the market
decreases and as the disparity in size between those firms increases.
Markets in which the HHI is between 1000 and 1800 points are considered to be
moderately concentrated, and those in which the HHI is in excess of 1800 points are considered
to be highly concentrated. See Horizontal Merger Guidelines ¶ 1.51 (revised Apr. 8, 1997).
Transactions that increase the HHI by more than 100 points in concentrated markets
presumptively raise antitrust concerns under the guidelines issued by the U.S. Department of
Justice and Federal Trade Commission. See id.
