News

Is Cablevision Serious About Satellite?

6/01/2003 8:00 PM Eastern

Cablevision Systems Corp. has hired a marketing firm for its direct-broadcast satellite venture, a move that makes some analysts believe the company might actually follow through with plans for a national service.

The MSO has been characteristically quiet about the satellite venture — dubbed Rainbow DBS — but conventional wisdom has held that it was just a matter of time before Cablevision either sold its spectrum or scrapped the project.

Cablevision spokeswoman Kim Kerns confirmed an account in the May 23 edition of Adweek, which reported that Cablevision hired The Interpublic Group of Cos., adding that IPG's Lowe Group agency would head up the effort.

$100M account

According to Adweek, Lowe would take on advertising, media buying, direct marketing, public relations, corporate identity and digital marketing duties for Rainbow DBS. The budget for the account was estimated at $100 million.

The budget for the project has not yet been determined, Kerns said. "We're focusing on the launch," she said.

The Rainbow DBS service, according to past Federal Communications Commission filings, would be a state-of-the-art spot-beam service offered to all 210 U.S. markets, complete with local programming and advanced digital set-tops capable of supporting high-definition television and high-speed data services.

Cablevision is currently leasing the 17 transponder spots to EchoStar Communications Corp., which is using the frequencies for some of its less popular programming. Although EchoStar would be a logical buyer for the Cablevision slots, in its fourth quarter conference call with analysts in March, EchoStar chairman Charlie Ergen said, "I don't know how much value that would have to us."

Cablevision has been toying with the idea of the DBS service for months. While the Bethpage, N.Y.-based MSO has been characteristically vague about the venture, investors have been displeased, because they believe a satellite service would take too much attention away from its core business.

At the Banc of America Securities LLC conference in New York May 21, Cablevision vice chairman William Bell offered little insight into Cablevision's DBS plans.

"We are planning on launching a satellite in late July," Bell said. "We hope to in short order be able to share what our initiatives are."

Cablevision was supposed to launch the satellite in March, but received an extension from the FCC until August. Cablevision said it needed the extension because its partner in constructing the satellite — Lockheed Martin Corp. — wanted more time to test its rocket.

Launching the service seems to fly in the face of recent Cablevision moves to divest of non-core assets. In December, it sold the Bravo cable network to General Electric Co.'s NBC television unit for $1.25 billion. In February, it decided to close its The Wiz electronics retail stores and last Friday, Cablevision closed on the $750 million sale of its Northcoast Communications Corp. personal-communications services wireless telephony licenses to Verizon Wireless.

Unpopular move

Most analysts had expected the DBS venture to be sold next, although they anticipated Cablevision would continue with plans to launch the service practically up to the day of a sale, in order to keep its spectrum licenses intact.

The news apparently hasn't spooked investors — Cablevision's stock was up 17 cents, to $19.84 each, in 4 p.m. trading last Tuesday. But some analysts expressed concern that Cablevision may go ahead with the DBS venture.

"Anything that is a meaningful outflow for the non-core business is not going to be that well-received," said SunTrust Robinson Humphrey cable analyst Gary Farber.

In the past, analysts have said that a Cablevision DBS service is too little, too late and would be crushed by established satellite providers like EchoStar and DirecTV Inc.

Tough niche

"It looks like EchoStar is the leader in the satellite business these days," Farber said. "I think they're very difficult for everybody today — cable, satellite or otherwise.

"I think the stock has worked because they've put their focus on what their core business is. If they go outside that area, it's not going to be perceived as well, probably."

So far, Cablevision has invested about $140 million into the DBS venture. The Bethpage, N.Y.-based MSO earmarked about $80 million for DBS this year, according to its most recent financial statements, filed with the Securities and Exchange Commission.

But what has investors worried the most is what the DBS service could potentially cost the company. In the past, Cablevision CEO James Dolan has said a full-fledged DBS service could require an investment of between $500 million and $1 billion.

By hiring an advertising agency, it appears that Cablevision is more serious about the DBS product than was originally thought. Although the MSO could get out of the contract if it scraps the DBS venture, it could be on the hook for millions of dollars to the agencies for any creative work they have done.

Creative tab

"Who's to say that they need to fulfill the full value of the contract?" Farber said. "It's been pretty unclear, even though they've said their focus is to pursue the launch, as opposed to selling the slot. It's been almost a year now, and it's still pretty unclear what their full intention is."

UBS Warburg LLC cable debt and equity analyst Aryeh Bourkoff said he believes that Cablevision's ultimate strategy will be to sell the DBS asset.

"The company will have to either sell the asset or generate partners to launch the service," Bourkoff said. "I don't believe the company's capital structure and financeability will be able to support an aggressive service launch on a stand-alone basis."

Bourkoff said that Cablevision also could make the DBS service part of a deal to acquire Vivendi Universal Entertainment's U.S. assets. Cablevision is reportedly teaming up with Vivendi Universal S.A. vice chairman Edgar Bronfman, Jr. to make a bid for VUE.

Cablevision would contribute its programming assets — AMC, Independent Film Channel and WE: Women's Entertainment — to the venture, in return for a 25% to 33% stake.

"They could be going through the motions," Bourkoff said.

Lowe CEO Jerry Judge declined to comment, citing that the two companies were still in negotiations.

"We're still in discussions," Judge said. "We can't talk about it at all."

March