Arguing that the merger would decrease competition for paid television services and thereby harm consumers, the FCC blocked the companies from combining their spectrum licenses and referred their proposed merger to an administrative law judge.
"The combination of EchoStar and DirecTV would have us replace a vibrant competitive market with a regulated monopoly," said FCC Chairman Michael Powell in a statement. "This flies in the face of three decades of communications policy that has sought ways to eliminate the need for regulation by fostering greater competition. I decline the invitation to turn our national communications policy back so many years."
In a statement, EchoStar, Hughes and General Motors, which is Hughes' parent company, said they were disappointed in the FCC's decision.
"We will continue to work aggressively within the context of this FCC process to achieve approval of the merger."
Representatives for EchoStar and DirectTV declined to comment. A Hughes representative did not return calls seeking comment.
Earlier this week, EchoStar and Hughes told the FCC that they planned to offer "major revisions" to the proposed merger and asked the commission to delay its decision on the deal. Last month, the Justice Department staff recommended that the government block the merger, according to published reports.
The merger would create the largest satellite television company, merging EchoStar's Dish Network with Hughes' DirectTV. The companies claimed that the merger would help them compete better with cable and would make it more feasible for them to carry local television broadcasts.
But the FCC rejected these claims. In most urban areas of the country, the number of pay television competitors would drop from three, including the local cable franchise, to two if the merger were approved, the FCC said. And in many rural areas, the combined satellite company would have a monopoly on paid television services.
Having such little competition would actually decrease the incentive for the combined satellite television company to offer local programming, the FCC said.
"Such a loss of competition is likely to harm consumers by eliminating an existing viable competitor in every market; creating the potential for higher prices and lower service quality; and negatively impacting future innovation," the FCC said in a statement.
The FCC's decision does not end the merger. EchoStar and Hughes can file an amended application with the FCC within 30 days and ask the commission to delay the hearing before the administrative law judge, the FCC said.
The companies can also present their case to the judge, although the burden of proof is on them in terms of introducing new evidence and on showing that they have addressed the objections raised by the FCC.
EchoStar and Hughestheir merger last October. The deal was initially valued at about $25.6 billion in cash and stock. Powell as early as last November that the FCC would closely scrutinize the deal.