News

Hughes Closes Telocity DSL Deal

11/01/2008 8:00 PM Eastern

DirecTV Inc. parent Hughes Electronics Corp. last Tuesday closed its purchase of digital-subscriber line provider Telocity Inc., which is now a wholly owned Hughes subsidiary.

The deal, first announced last December, helps Hughes in its efforts to market both DirecTV direct-broadcast satellite video service and a choice of high-speed data offerings from Telocity or its satellite-based Hughes Network Systems' DirecPC operation.

Telocity will remain based in Cupertino, Calif., a suburb of San Jose. Hughes and DirecTV are headquartered in El Segundo, Calif., next to Los Angeles International Airport.

Former Telocity chief financial officer Ned Hayes was tapped as president of the DSL subsidiary, said Hughes spokesman Richard Dore. He reports to Hughes consumer sector corporate senior vice president Eddy Hartenstein, who is also DirecTV's global chairman.

For competitive reasons, the company must make high-speed Internet access available to all homes across each DirecTV market, Hartenstein said last Tuesday at The Big Picture, a New York media conference co-sponsored by Cahners Television Group. DirecTV plans to become a whole-house service provider, he added.

A DSL option can help DirecTV compete more directly with cable operators that have aggressively deployed high-speed cable modems and a two-way interactive pipe for digital cable television.

Direct-broadcast satellite rival EchoStar Communications Corp. is also eyeing a DSL component to help strengthen its telecommunications bundle. During an earnings call last month, CEO Charlie Ergen told analysts the company would be more likely to structure strategic marketing partnerships with DSL providers than to buy such a company outright.

EchoStar late last year began offering a bundle of its DBS television service and high-speed data service from two-way satellite provider Starband Communications Inc., in which EchoStar has an investment.

Telocity serves customers in 150 metropolitan markets through partnerships with last-mile DSL providers, including regional Bell operating companies and competitive local-exchange carriers.

Among its last-mile providers was Northpoint Communications, which plans to shut down its DSL service. Telocity has assured customers that it will do its best to find alternative providers.

In addition, Telocity won't bill for missed service and will offer a free month's service in the event of any disruption.

In the days immediately after the close of the Hughes-Telocity deal, consumers who call to buy the DSL service will hear a pitch for the Telocity brand. However, Hughes is examining how it may restructure the name of the service over time.

In short order, current DirecTV and Telocity customers will receive pitches for the other division via direct mail. Because the DSL service is not universally available in all DirecTV territories, it would be less efficient to market the service on-air, DirecTV global digital media president Larry Chapman said.

"Our customers have a very disproportionate usage of computers," Chapman said, adding that many DirecTV subscribers are technophiles or fall into the high-income bracket.

In focus groups, DirecTV found that more consumers were willing to accept a DirecTV-branded DSL service than originally expected.

Initially, Hughes will play up Telocity's PC-based communications features, including the ability to connect multiple computers, plus providing firewall and other information security options.

The company is still evaluating whether Hughes will ask DirecTV manufacturers to incorporate a DSL connection into every set-top box. Telocity plans to market a DSL-based home gateway that can connect multiple devices in the home, including advanced DirecTV set-top boxes, computers and other Internet-enabled home appliances.

"The ability to interconnect in an easy, seamless fashion and move media to different areas of the house is the next big thing," Chapman said. "The gateway that Telocity developed allows for home networking and automation."

Cable operators also are looking at extending their services into home networking. At last week's Big Picture conference, Cox Communications Inc. CEO Jim Robbins said managing in-home Internet devices would be "a huge opportunity for someone who has a good relationship with their customers." He added that where Cox markets cable modems against DSL, Cox is able to win 13 of 14 new high-speed data customers.

Chapman said he expects a number of DirecTV retailers would also begin selling the company's DSL service in time for this year's holiday selling season, although he could not yet name the dealers. Because Hughes can offer a "broadband anywhere" solution between DSL and satellite, he added, "that's something retailers can really get behind."

National retail availability of high-speed data services, either by DSL or two-way satellite, should give DirecTV an advantage over cable, Chapman said.

"Consumers can go to retail and not wait for cable to build out these services," he said.

Hughes said that about 94 percent of Telocity's shares had been tendered by close of business Monday, April 2. Shares of Telocity's common stock ceased to exist at close of business Tuesday, April 3.

Hughes is expected to report its total DSL subscriber base at its next earnings call in mid-April.

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