DirecTv Gains MTV Nets Basics from USSB

1/11/1998 7:00 PM Eastern

Digital Satellite System platform partners U.S. Satellite
Broadcasting and DirecTv Inc. announced last week that USSB will shift its seven popular
basic-cable channels to DirecTv March 10.

DirecTv will add MTV: Music Television, M2, Nickelodeon,
Nick at Nite's TV Land, Lifetime Television, VH1 and Comedy Central to its Total
Choice package, with no additional charge to subscribers.

'This has to be one of the worst-kept secrets in the
industry,' said Eddy Hartenstein, president of DirecTv, of the widely rumored deal
after its announcement last Tuesday.

Stanley E. Hubbard, president and CEO of USSB, said the
deal took nearly a year to accomplish. 'It's the best thing for DSS, for DirecTv
and certainly for USSB,' Hubbard said.

It's also good for the programmers that supply the
basic channels. Christine Sheehan, senior vice president for market development at MTV
Networks, said the deal will almost double the networks' subscriber base of DSS

Today, DSS is in more than 3.3 million homes. Roughly
one-half of those subscribe to USSB and, of the estimated 1.7 million USSB customers,
about one-half of those subscribe to the basic channels, Hubbard said.

Hartenstein said DirecTv did not offer any financial
incentives to USSB in trade for the basic channels.

Instead, USSB gains access to scarce channel space that it
can use to beef up its more lucrative premium-movie lineup.

USSB announced last week that it will add Showtime Extreme,
a new action- and suspense-movie network from Showtime Networks Inc. 'Showtime
Extreme is the result of lots and lots of consumer research,' Hubbard said,
'most of it to the USSB subscriber audience. It's a tremendous fit into the USSB

Although USSB will be the first multichannel video provider
to launch Showtime Extreme, it has not signed an exclusive agreement with Showtime, which
is free to market the channel to other providers.

USSB will also be the first direct-broadcast satellite
company to offer FXM: Movies from Fox, an all-movie network created by Hollywood studio
20th Century Fox.

Hubbard said last week's announcement allows USSB to
concentrate its focus on movies and big-event pay-per-view programming.

'The day that the switch takes place, we believe that
our net revenue will be improved,' Hubbard said, pointing to the per-subscriber
license fees that the company will no longer have to pay for the basic channels. Many of
its subscribers received the basic channels as part of a larger package that included
premium-movie services.

Basic channels account for about one-quarter of the
service's bandwidth, but only 10 percent of its gross revenues, said people close to
the network.

The move also gives the entire DSS platform a simpler
marketing message, especially at the retail level.

'Putting all of the basics in one package certainly
gives an easier way to compare DSS, especially to cable,' Hubbard said.
'It's an apples-to-apples comparison with cable now.'

While DirecTv now has all of the basic channels on DSS,
USSB has not cornered the market on premium-movie services: DirecTv offers services such
as Starz! and the rest of the Encore Media Group lineup. Hubbard said there was never any
discussion of USSB's taking over those premium services from DirecTv. For one thing,
USSB would not have had the bandwidth, he said. Hubbard added that he wanted to be able to
offer brand-new premium channels to add value to the DSS platform.

Hubbard said he expects to announce more new premium
services -- likely from Home Box Office or Showtime -- within the next few months. He said
USSB is not likely to use its recently found bandwidth for nonmovie channels, unless they
are related to boxing.

Steve Blum, president of DBS consultancy Tellus Venture
Associates, said more premium movies may not be enough to keep USSB subscribers from
churning out after the basic channels move to DirecTv.

'You'll see a decrease of penetration of the DSS
universe,' he said. 'I don't think the value of a fourth channel of
Showtime is the same as that of the first channel of Nickelodeon.'

Rob Kaimowitz, satellite-industry analyst at C.E. Unterberg
Towbin, said he has mixed reaction to the news. 'I think it will affect their capture
rates of DSS households negatively,' he said, 'but it will affect their revenues

Hartenstein said DirecTv had set channel space aside in
anticipation of adding the basic channels. Because its subscriber rates are higher than
USSB's had been, DirecTv is likely to get volume discounts on the programming fees,
which helped to allow DirecTv to add the channels without raising its packaging prices.

'The big story here is that as cable operators raise
rates, we're adding channels,' Hartenstein said.

Putting all of the basic channels in one package from one
company will help to sell more DSS product at retail, analysts said. 'They just took
away some of the confusion,' said Jimmy Schaeffler, chairman and CEO of The Carmel

'DirecTv has a very strong basic package now
that's going to draw people in,' Blum said. 'It makes it much easier for
salespeople on the floor to sell. If you're making life easier for the guys on the
floor, you're helping DSS.'

Total Choice from DirecTv sells for $29.95 per month.

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