The Charlie Ergen Show Echostar's founder is one tough operator who will soon take control of the satellite TV industry--if Washington lets him.
(FORTUNE Magazine) – For the past decade or so, ever since engineers figured out how to beam hundreds of TV channels from satellites orbiting 22,300 miles above the earth down to pizza-sized dishes perched on roofs, powerful media and technology companies have battled for control of the skies. There was industry pioneer DirecTV, which is owned by General Motors' Hughes Electronics Corp., and Rupert Murdoch's News Corp., and cable operators led by John Malone, and MCI before it became WorldCom, as well as, briefly, General Electric's NBC and the Dolan family's Cablevision. Microsoft and AOL lurked on the edges, looking for openings. The epic struggle isn't over yet, but to almost everyone's surprise, the executive who today stands poised to take command of the $10-billion-a-year satellite-TV business is a country boy from Tennessee--his words, not ours--named Charles W. Ergen.
Little known until recently, Ergen is the 49-year-old founder, chairman, and CEO of a company called Echostar Communications, which last fall unexpectedly struck a $28 billion deal to merge with its bigger rival, Hughes. Five years ago there were five satellite-TV services; if the Echostar/Hughes merger manages to win regulatory approval, there will be just one, a TV-distribution giant with more than 18 million subscribers that will compete with cable operators across America. Overnight Ergen would become one of the most powerful people in media--too powerful, say opponents of the deal, a motley crew that includes Murdoch, Malone, the attorneys general of several states, the trade association for TV stations, and a cooperative of rural phone and electric companies. If the deal goes through, Malone has said, "Charlie is the king of the world.... He will be wealthier than Bill Gates in 20 years."
That is hyperbole, although Charlie--everyone in the business calls him Charlie--has done very well for himself already. His 50% stake in Echostar, a company he started 22 years ago with his wife, Candy, and a poker buddy named Jim DeFranco, is worth about $3.7 billion. Before the stock market collapsed, he was worth three times that. But there is nothing regal or ostentatious about this would-be sky king. Ergen speaks in a Southern drawl, owns maybe two suits, flies commercial, and stays at Holiday Inns and Marriotts, where, following company policy, he usually shares a room with an Echostar colleague. (When a former Echostar executive named Carl Vogel was recently asked about Ergen, he replied, "I don't know him as well as I used to. I don't room with him anymore.") Ergen also hosts a 1950s-style TV show called Charlie Chat on Echostar's DISH Network, where he gives away prizes and takes calls from subscribers. Low key and affable, he'll spend hours at industry gatherings chewing the fat with the mom-and-pop retailers who sell Echostar dishes. "He's the least imperial, most down-to-earth CEO I've ever met," says Karen Watson, a former FCC executive who now runs Echostar's Washington, D.C., office. Candy Ergen and their five children have traveled with him to watch all seven of Echostar's satellite launches--journeys that have taken them to China, Kazakhstan, and French Guiana as well as Cape Canaveral.
Yes, most people like Charlie. They just don't want him running a monopoly, because he plays rough. "People who have built industries from the ground up tend not to play by the rules," says Steve Berman, an executive at the National Rural Telecommunications Cooperative, a reseller of DirecTV. "Everyone respects Charlie. Everyone's also afraid of Charlie." Shrewd, passionate, and determined to win, Ergen pushes the limits of acceptable business conduct to advance Echostar's interests. "He is brilliant, relentless, and merciless in business," says Bob Scherman, the iconoclastic editor and publisher of Satellite Business News, the industry trade paper. In just the past five years Echostar has sued, or been sued by, all the major TV networks, Hughes, News Corp., Disney, Microsoft, Comcast, Gemstar-TV Guide, the insurers of a satellite that malfunctioned, and a Chicago law firm that won a major lawsuit for Ergen, after which he refused for a time to pay a large contingency fee. "Litigation is a sport to these guys," Scherman says. "Echostar will push the proverbial legal envelope until it tears."
In 1988, U.S. Customs agents raided Echostar offices in Miami, Dallas, and Tempe, Ariz., and charged the company with illegally exporting set-top boxes. Ergen admitted lax supervision, settled the case by giving $800,000 worth of dishes to schools, and says he learned a lesson. But has he? Echostar still has a reputation for thumbing its nose at regulators; in April the FCC admonished the company for "disingenuous behavior and a lack of candor."
Some of this, to be sure, is because Echostar still sees itself as an underdog that has to fend off bigger predators. "As a little guy, we get stepped on," Ergen says. It's the classic startup mindset. But Echostar is no longer an upstart--the company had revenues of $4 billion last year. Ergen's behavior could come back to haunt the company because he needs the FCC, along with the antitrust division of the Justice Department, to approve his merger.
The thing is, asking Ergen to play nicely with others is like asking Ted Turner--to whom he's been compared--to sit quietly in the back of the room. Charlie's a street fighter. Even as a teenager playing basketball in Oak Ridge, Tenn., where his father was a nuclear physicist--so much for the country-boy image--he looked for a competitive edge when facing bigger opponents. "I was a 5-foot-11 forward," he says. "Which is great preparation for being a billion-dollar company competing against hundred-billion-dollar companies. You learned to step on their foot so they couldn't jump."
Ergen studied finance at the University of Tennessee, became a CPA, and worked for Frito-Lay before striking out on his own. He found his calling in 1980, when he and DeFranco bought a franchise to distribute C-band satellites in three Western states. They were in what was called the BUD business--for big, ugly dishes, which cost up to $20,000 apiece but were the only way to receive cable channels in much of rural America. (One wag called them the state flower of South Dakota.) Ergen and DeFranco moved to Denver and began delivering and installing dishes themselves. "I was an accountant, digging holes and pouring concrete," Ergen says. (DeFranco says, "After the first two installations, I tried to leave him back at the office.") Echostar expanded rapidly, eventually wholesaling the big dishes to thousands of retailers worldwide.
Hughes, meanwhile, was preparing to launch DirecTV. A defense contractor stocked with satellite engineers, Hughes came at the business from the sky down; its technology made possible the 18-inch dishes that brought satellite TV to cities and suburbs for the first time. The DirecTV product offering was superior to cable, with more channels and higher-quality pictures and sound. But the economics were unpredictable, and Hughes had no experience with consumers, so launching the service was a "big gamble," recalls Eddy Hartenstein, DirecTV's chairman. News Corp., NBC, and Cablevision, all original partners with Hughes, opted out before DirecTV's debut in 1994, much to their subsequent regret.
Realizing that its oversized dishes were obsolescent, Echostar scrambled to launch its own small-dish network in 1996. Ergen couldn't afford to get into a marketing war with DirecTV, even after raising $300 million in junk bonds and taking the company public in 1995. (Echostar actually distributed the DirecTV service for 18 months to help pay the bills.) But in contrast with Hughes, Ergen came at satellite TV from the ground up--he knew the customers, he had a network of loyal retailers, and it was a safe bet that Echostar could operate its service, called DISH, more nimbly and efficiently than a company that had lived off government contracts. "We built the company to be the low-cost producer, soup to nuts, in every way," Ergen says.
That's indisputable. Echostar licensed technology from startups rather than established players, designed its own program guide, used a generic set-top box maker, ran its own customer service operation, and built its uplink facility in Wyoming, where electricity is cheap. (DirecTV's uplink is in L.A.) Ergen even hired the China Great Wall Industry Corp., a Chinese rocket company with an unnerving 50% failure rate, to send his first satellite into orbit because he couldn't afford U.S. rockets. While the Echostar launch went off without a hitch, six weeks later a Chinese rocket carrying a TV satellite for a Latin American venture backed by Murdoch and MCI crashed into a village. So Charlie has been lucky as well as smart.
While DirecTV's Hartenstein deserves credit as a trailblazer, Ergen has been the industry's innovator. Echostar drove down the price of buying and installing satellite TV from nearly $900 to less than $200. (Programming packages cost about $55 a month, on average.) Ergen led the regulatory battle that allowed the satellite companies to include local TV stations in its package. Echostar was the first to offer two-way high-speed Internet access and the first to build a digital video recorder into a set-top box. "Echostar is the better run of the two companies," says Scherman, the trade publisher.
The Echostar culture remains frugal. Headquarters are a former shopping mall in Littleton, Colo., that Ergen bought when the developers went bankrupt. No executive was paid more than $250,000 last year, though all get stock option grants. And even today Ergen personally signs every check for more than $10,000, a task that takes him three or four hours each week. Yet he's no Scrooge. His employees seem to like him because he offers them opportunity and fun; the company's first five satellite launches were marked with big parties and stock grants of ten shares for each worker. He also seems to care about his subscribers, negotiating tough deals with programmers like Disney to keep prices down. And how many CEOs go on TV to take calls from customers?
All this has helped Echostar close the gap with DirecTV. Today Echostar has about 7.3 million customers, to DirecTV's 10.7 million, and it's growing faster. The rivalry hasn't been friendly. Two years ago Echostar sued Hughes (surprise!), claiming that DirecTV violated antitrust laws by keeping Echostar's DISH network out of retail chains like RadioShack. In a countersuit Hughes's lawyers alleged that Echostar committed "unfair, unlawful, and fraudulent business acts" and behaved in ways that are "unethical, oppressive, unscrupulous, and/or substantially injurious to customers." As Hughes CEO Jack Shaw now says wryly, "That doesn't make for warm bedfellows."
So, few people expected Echostar to acquire Hughes when GM put its prize asset on the market late in 2000. Murdoch, the leading suitor, put a complex merger offer on the table in conjunction with Microsoft and Malone's Liberty Media. (AOL, FORTUNE's parent, had already bought a minority stake in Hughes. AOL isn't taking a public position on the merger, and it would own less than 5% of the combined company.) GM and its investment bankers struggled to value the deal and worried that News Corp., Liberty, and Microsoft would milk its shareholders. "Everybody wanted more than their share," says a Hughes insider. Murdoch hurt his own cause by badmouthing DirecTV's management and refusing to pay a premium for Hughes stock. As the process dragged on for more than a year, Hughes's valuation plunged.
At first Ergen couldn't even get a hearing from GM. People thought he was just trying to muck up a deal with Murdoch. Then they ignored him because of the antitrust concerns. Of course Ergen persisted. He argued that the merger made sense because the companies could save billions on infrastructure and use combined limited spectrum to deliver more services. He offered a premium for Hughes shares and hired lawyer David Boies to convince GM that the deal could be sold in Washington. And when one of Echostar's investment banks got cold feet at the last moment, Ergen pledged $2.5 billion of his personal stockholdings to guarantee the deal. "He put his own stake on the line to make this happen," a GM executive says admiringly. One person who wasn't surprised by the outcome was Stephen Ketchum, an investment banker with UBS Warburg who has worked with Echostar since its founding. "Charlie's been talking about buying DirecTV for years," he says. "I would never, ever bet against him."
Experts say it's by no means certain that the deal will clear the regulatory hurdles. "It's got about a one-in-three chance," says Blair Levin, a former FCC chief of staff who is now a Washington-based analyst with Legg Mason. News Corp., which still covets DirecTV, is mobilizing opposition to the deal. "I have not seen a merger in 22 years that was more clearly illegal," says Lloyd Constantine, a lawyer for News Corp. Even if the FCC and Justice give their okay, the attorneys general of several states have said they will try to block the deal. The problem is, the merger creates a monopoly in rural areas where there is no cable, and a duopoly in the rest of the country between the local cable company and DirecTV, which will be the surviving brand. Anyone who's bought a ticket for the shuttle flight between New York and Washington knows that having just two competitors doesn't keep prices down.
Ergen is promising regulators that he will address any problems raised by the merger and says that the benefits outweigh the drawbacks. For example, he says, rural consumers won't be gouged because he'll offer a uniform national price for DirecTV. "Whether you're in a town of five or a town of five million, you're going to get the same service at the same price," he says. More important, he says, Hughes and Echostar need to merge to provide affordable high-speed Internet access, which is vital both to rural areas and to the satellite industry's ability to compete with cable. What's more, he argues, combining the companies' signals will free up more spectrum for delivery of local TV signals.
Each of those arguments is complicated and controversial, generating piles of documents for the FCC and Justice. The best argument for the deal is a broader one: that without it neither Echostar nor DirecTV will have the weapons it needs to compete vigorously with cable. Satellite's advantages over cable have eroded, and its growth rate has slowed, as cable systems have upgraded to offer digital pictures and sound, broadband, and even video on demand. "Cable is still an entrenched monopoly, with over 80% of the marketplace," Ergen says, "and we haven't stopped their rate increases." Politicians and regulators would love to enable Ergen, the battler, to go after cable customers even more aggressively than he has.
No matter the outcome, Ergen's in good shape. By most accounts he has frozen the rest of the industry for a year. He has demoralized people at DirecTV and learned their secrets. (The Hughes people say they have also gotten inside Echostar.) He broke the lock that DirecTV had on the chain stores, doing deals that got Echostar into RadioShack and Wal-Mart.
In August, as speculation heated up about the merger and this story went to press, Ergen was climbing 19,000-foot Mount Kilimanjaro in Tanzania with his family and friends. He got into hiking after moving to Colorado and approached the activity with his usual determination. Last spring he became one of a small number of hikers to have scaled all 54 of the 14,000-foot peaks in the state. Yes, he likes the outdoors and spending time with his family and friends, but there's more to it than that. "What I really like," he says, "is that at the end of 24 hours, you've accomplished something." There you have it: Even on his days off Charlie Ergen can't help reaching for the skies.