EchoStar Communications Founder, Chairman and CEO Charlie Ergen wants to achieve broadband supremacy so badly that he is willing to gamble half his personal fortune in a $25.8 billion bid to take Hughes Electronics and its DirecTV satellite business off the willing hands of General Motors. Ergen's bet is that the nationwide two-way satellite assets of a bolstered EchoStar will make the company part of a troika of broadband players—along with DSL providers and cable modem operators—and appeal to regulators as a way to close the so-called digital divide in underserved rural areas.

The deal also would put in limbo DirecTV's DSL service capability, which the company acquired when it bought Telocity but that has yet to generate significant revenue. EchoStar has plans to offer two-way data services but has never delved into the DSL market.

The odds are long that even a Republican-controlled government will support an unconditional merger between the nation's two biggest direct broadcast satellite providers (see related story). The merged entity would have about 17 million video entertainment subscribers immediately and as many as 25 million in five years, according to The Yankee Group. Cable's largest provider, AT&T Broadband, has about 14 million subscribers, but it's under siege by Comcast to become a single entity that would boast about 22 million.

Ergen's argument in favor of the merger is based largely on the company's ability to serve rural customers.

“There is no way we're going to be able to treat those people in rural America as if they had the same opportunities as [those in] the city unless we put these two companies together,” Ergen said.

Whether regulators buy this talk is unknown. Ergen's argument is that “there needs to be less competition in order for there to be more competition” said Scott Cleland, CEO of The Precursor Group.

As proposed, the merger leaves Hughes in a majority shareholder position but gives EchoStar and Ergen management control. It incorporates Hughes' holdings, including global satellite provider PanAmSat and DSL delivery service DirecTV Broadband. To make the deal, Ergen was persistent and persuasive enough to upend Rupert Murdoch, whose News Corp. pulled the plug on a long-standing offer just hours before the EchoStar deal was announced.

“I don't think GM was entirely thrilled with [Murdoch's deal],” said Michael Goodman, analyst for The Yankee Group. GM has cut a lousy deal but had no alternatives when Murdoch withdrew his bid, Goodman said.

If Ergen doesn't get federal approval, EchoStar will have to give GM a $500 million “make-good” payment. But it might be worth it.

“He's getting to put his primary competitor on ice. He's going to de-fang [it],” Cleland said. And if Ergen wins, he's going to create a true competitor to cable television, both in digital and in data service.

History may be on Ergen's side. Satellite served its purpose by delivering a video product that forced cable to upgrade. Now it must match cable's broadband data offerings — especially in rural areas. “There's not enough spectrum, and the must-carry [local channel] burden is too strong for us to be able to do it any other way,” Ergen said.

Technically, “that's a bunch of BS,” Goodman said. “They're using different satellites for the two-way, so the spectrum they're using for the must-carry has nothing to do with the spectrum they're using for broadband [data].”

Ergen is willing to negotiate, saying his customers “are asking time and time again for broadband and local channels, and [a merger] is the only way we can do it.”

He's probably exaggerating. Hughes already offers high-speed services with DirecTV Broadband and should have about 100,000 subs by year-end. It also has a satellite data launch planned for 2003. DirecTV Broadband could benefit from standardized, data-enabled set-tops, which have not been developed in the current satellite duopoly.

“It's all about making sure each of our 16, 17, 18 million subscribers have the opportunity to access to broadband Internet,” said Ned Hayes, president and CEO of DirecTV Broadband.

The fate of DirecTV's DSL services likely will be determined as the companies move through the process over the next 10 to 12 months, an EchoStar spokesman said. “DirecTV Broadband services are just another piece of the puzzle we have yet to sort out,” he said.

Meanwhile, Ergen must explain his own monopolistic satellite proposal. “They talk about not wanting to have a monopoly for cable. But does that mean it's OK for satellite to have monopoly markets?” Goodman asked.

Ergen offers a nationwide pricing plan and points to the National Rural Telecommunications Cooperative, which now rebroadcasts DirecTV content, as a second programming source. Additionally, DirecTV has a number of resale agreements with larger telcos, including SBC Communications and Verizon.

DirecTV franchisee Pegasus Communications would benefit from a merger by expanding its footprint with EchoStar, and it is likely to become the designated competitor to the merged entity in areas where there is no cable competition. Pegasus, in fact, could even become its own monopoly, based on its understanding of its agreement with DirecTV.

“We have the exclusive right to provide DirecTV service in our service area,” said Mark Pagon, Pegasus' chairman, president and CEO.

But becoming the exclusive distributor of DirecTV services may never come to pass, he admitted. “The burden is really on EchoStar and Hughes at this point to lay out more specifically what their plans are in terms of combination of the platform.”

Pegasus is even less confined in its relationships with other satellite providers—most notably, News Corp.—and must be considered as a potential partner in a national competitive effort.

“We're approached by a lot of buyers,” a Pegasus spokeswoman said. “We feel like we're in a good position either way because through the merged entity we'll have the rights to a lot more subscribers, and if there's such a thing as facilities-based competition, that might be a way to participate as well.”

Ergen's attacks drew no return fire from a cable industry that is watching its own potential brouhaha if Comcast manages to get its hands on AT&T Broadband.

“We don't wish regulation on our competitors. We don't go around trying to sabotage our competitors' deals,” said a National Cable & Telecommunications Association spokesman. “As a rule, we are deregulatory.”