Musey on Merger Rejection: OK for Consumers, Tough on Investors

[Gregg Lengling]

A rather-blunt view on the DBS merger from one Wall Street analyst suggested that the looming rejection of the EchoStar/DirecTV is good for consumers, if not for investors.

Salomon Smith Barney analyst Armand Musey, in a research note partly dedicated to the proposed DBS combination, said he disagreed with merger proponents that DBS is doomed to second tier status among pay-TV providers if the deal collapses. He also took issue with claims that consumers will be forced to accept higher subscription rates if the merger fails to win regulatory approval.

"While we readily acknowledge a combination of DISH and DirecTV would have created a very dynamic competitor and investors would have benefited, we are less convinced that consumers would not have borne a heavy cost for its creation," Musey said in the note released this week. "Instead, we would argue that the U.S. multichannel television industry has become decidedly more competitive over the past year because of the competitiveness of the DBS companies on a standalone basis, benefiting both rural and urban consumers."

Musey said two factors have emerged to insure that the competitive trend continues. The first is that the multichannel TV business is hitting mature levels of market penetration, which is driving increased competition between providers. The second factor is that the competitive differentiation between DBS and cable is diminishing, which is increasing consumer choice.

"As the multichannel television market has become saturated, and as DBS and cable have become less differentiated, they are increasingly being forced to compete on price," Musey said.

While a competitive landscape may be a plus for consumers, Musey warned investors that emerging trends in the marketplace are not necessary positive from a shareholder's perspective. "Increased competition means lower returns – somebody has got to pay for the consumer's benefits," Musey said in the note.