PrimeStar Inc. said it would aggressively fight a U.S.Department of Justice antitrust suit filed last Tuesday that would prevent it from gainingaccess to the last available full-CONUS (continental United States) direct-broadcastsatellite slot.
PrimeStar will have support from MCI Communications Corp.and News Corp., with which it has a contract to use 28 DBS transponders at the 110 degreeswest orbital spectrum.
The DOJ's announcement incited heated speculation overwhich company would ultimately end up with the 110 spectrum if PrimeStar loses its fight.
For the past several weeks, PrimeStar had said that it wasmaking progress with the DOJ in drafting a consent decree for the terms of a mergerbetween PrimeStar and American Sky Broadcasting, the joint satellite venture of MCI andNews Corp.
But in a surprise press conference last Tuesday, JoelKlein, assistant attorney general for the DOJ's antitrust division, said he was nolonger negotiating with PrimeStar, and he would seek to have the transaction blockedoutright.
The DOJ filed a 35-page complaint with the U.S. DistrictCourt for the District of Columbia last Tuesday, asking that PrimeStar, MCI and News Corp.be enjoined from carrying out their $1.1 billion merger agreement, which dates back toJune 11, 1997.
As an alternative, the DOJ would grant the deal ifPrimeStar's cable owners divested their ownership interests in PrimeStar.
"That's probably the one thing that we deemunreasonable," PrimeStar president and chief operating officer Dan O'Brien said.
In calls with reporters and analysts last Tuesday,O'Brien expressed shock and frustration that the news broke abruptly, without advancewarning from the DOJ.
"After months of inquiry, discovery, depositions anddiscussions, to basically have this end with no communication and an about-face has beenvery frustrating for us," he said.
PrimeStar's loss was its DBS competitors'delight. Shortly after the DOJ news broke last Tuesday, DirecTv Inc. and EchoStarCommunications Corp. issued separate statements applauding the actions.
"It is not in the public interest to give the singlepiece of real estate in space that is most capable of fostering effective competition tocable to the largest cable and content cartel in the world," said EchoStar chairmanand CEO Charlie Ergen.
BOOST TO ECHOSTAR
Wall Street seemed to side with EchoStar last week. Itsstock shot up on the news, just as the stock price for TCI Satellite Entertainment Inc.(TSAT) -- which owns PrimeStar, pending the proposed merger -- took a dive.
Some analysts wondered why it took the DOJ nearly a year toact.
Evie Haskell, managing director of SkyTrends in Golden,Colo., suggested that PrimeStar could be a victim of the "merger-mania" thatseems to have taken hold of Washington, D.C., lately.
Others thought that the decision seemed almost personal.
"There seems to be a clear intent in Washington tokeep PrimeStar out of the DBS business," said Steve Blum, president ofCalifornia-based Tellus Venture Associates.
Blum added that this wasn't the first time that thegovernment turned PrimeStar down when it came to DBS spectrum. He contended that PrimeStarhas changed since the days when it was conceived as a defensive strategy to prevent otherDBS companies from entering the market.
"I think that the PrimeStar that the Department ofJustice is coming down on is the PrimeStar of four years ago," Blum said, "andnot the PrimeStar of today."
Curt Alexander, an analyst with Media Group Research,speculated that the antitrust suit "might be the best way for the Justice Departmentto save face and extract something more from cable."
Bob Berzins, senior vice president of high-yield researchat Lehman Bros., was not as optimistic. "The language left no room fornegotiations," he said. "It's difficult to come up with a compromise whenthe language was so vehement."
The decision will forever change the landscape of the DBSindustry, said Mickey Alpert, president of Washington, D.C.-based Alpert and Associates."Cable will now have to take a backseat in any DBS deal," he said.
MCI paid the government $682.5 million for the 28transponders at 110 -- the first U.S. DBS spectrum to be sold at auction. MCI won thespectrum in January 1996, after EchoStar drove up the price in aggressive bidding.Tele-Communications Inc. dropped out earlier in the bidding, and DirecTv chose not to bidbecause the government would have required the company to divest other DBS spectrum inorder to gain 110.
WHAT HAPPENS NEXT?
An MCI spokeswoman said last week that the company wouldsell the assets at 110 if the deal with PrimeStar falls through.
More than two years after the 110 auction, however, it willbe harder for any new player to build a profitable DBS business if it has to pay MCI fullvalue for the 110 slot, observers said.
"It's entirely likely that MCI paid $682.5million for spectrum that will never be used," Alexander said.
That's not to say that there are no takers.
All three current DBS providers -- DirecTv, EchoStar andU.S. Satellite Broadcasting -- have expressed interest in the transponders. USSB has threetransponders there already. And EchoStar had a short-lived deal with ASkyB early last yearthat would have allowed the company to expand its operation with extensive local-to-localservice through the use of 110.
The DOJ complaint detailed claims that PrimeStar'scable owners deliberately dismantled the EchoStar/ASkyB deal.
Analysts said it was unlikely that the EchoStar deal wouldbe put back together, even if the PrimeStar-ASkyB merger falls through. Blum said NewsCorp. -- which supplies programming to cable through its Fox Television cable networks --does not want to antagonize the industry now by competing against it.
As unlikely as the scenario may be, the one thing thatcould lead to a possible EchoStar/ASkyB reunion is the threat of a $5 billionbreach-of-contract lawsuit pending against News Corp.
DIRECTV AND USSB?
Steve Cox, senior vice president of new ventures forDirecTv, said the company has no specific business plans for 110 in the event that itbecomes available, but it could be used to help broaden the service for Digital SatelliteSystem subscribers.
DirecTv shares the DSS platform with USSB at the 101degrees west slot. If either company won the rights to 110, the DSS service couldconceivably be carried over to both satellite spaces. But that would require modificationsto existing DSS receivers, as well as the repointing of DSS dishes that are currently inuse.
"There would be some technological challenges to doingso, but they're not insurmountable," Cox said.
USSB is said to be planning a data service at the 110transponders that it already controls. Its president and CEO, Stanley E. Hubbard,wouldn't rule out the possibility of expanding such a service if the additional 28transponders became available, but he said it's not a likely scenario.
Klein said last Tuesday that he would prefer that the lastfull-CONUS slot to go to an existing DBS provider, rather than to PrimeStar, adding thatlocal-to-local broadcast service would be a good use of the spectrum.
O'Brien countered that it's not a decision thatthe DOJ is entitled to make, since MCI and News Corp. bought the spectrum.
Raleigh, N.C.-based Capitol Broadcasting Co. Inc., throughits Local TV on Satellite LLC subsidiary, wants to develop a wholesale local-channelservice for DBS providers. But Jim Goodmon, Capitol's president, said last week thatthe company has no plans to go after the Ku-band spectrum at 110, and that it will stickwith Ka-band.
Industry analysts believe that Loral Space andCommunications Corp. is the most likely third-party candidate to seek out the 110 spectrumif it's made available.
O'Brien said PrimeStar would have to consider givingup its fight for 110 if it did not have a favorable decision in time to make itshigh-power DBS receiver and 18-inch dish available for the 1999 holiday selling season.
PrimeStar also needs approval from the FederalCommunications Commission to operate a high-power DBS service.
Last week, FCC chairman William Kennard said in a preparedstatement that the DOJ's action confirmed his view that a PrimeStar/ASkyB transactionraises "significant competitive issues."
Kent Gibbons and Ted Hearn contributed to this story.