DBS Keeps Tight Rein on Price Increases

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As cable operators across the country continue to pass
increased programming costs on to their consumers, some wonder when the direct-broadcast
satellite industry will follow suit.

But the word from DBS executives and industry analysts is:
not anytime soon.

Although DBS-price increases are not unheard of -- recent
copyright rulings led DirecTv Inc. and EchoStar Communications Corp. to pass on fee
increases for networks and superstation feeds -- competition among the DBS players keeps
them from raising the prices on their entry-level packages.

"We can't afford to raise our prices and position
ourselves as the one DBS company that does that," said Denny Wilkinson, senior vice
president of marketing and programming for PrimeStar Inc.

Wilkinson said PrimeStar will introduce
national-programming prices and packages July 1 to rectify the differences between the
various offers among the former PrimeStar partners. The company announced its roll-up into
a single entity in April.

PrimeStar will grandfather any prices that would have been
lower than the new national program. Wilkinson added, "A good number" of
PrimeStar subscribers would see decreases once the national pricing kicks in.

Excluding the lease fee for a PrimeStar set-top box, the
price of PrimeStar's entry-level "PrimeValue" package will be $22.99 per
month. That's slightly higher than the $19.99 each for EchoStar's "Top
40" Dish Network package or DirecTv's "Total Choice."

But, Wilkinson said, PrimeValue will have the lowest cost
per channel of the DBS companies, and it will include regional sports and a compact
disc-quality audio service that its competitors reserve for more expensive packages.

To date, most PrimeStar customers have leased their
equipment, which adds to the monthly cost. PrimeStar is offering to sell the hardware to
its existing subscribers, and it is selling it to new customers through a $149 RadioShack
special.

Wilkinson admitted that competition in the DBS market has
forced PrimeStar to keep its prices in line. "When Charlie [Ergen, chairman and CEO
of EchoStar] came in at $19.99 [per month], the whole world changed. I don't feel
that the marketplace would allow us to take a price increase."

Even EchoStar has not been immune to price increases, said
Mickey Alpert, president of Washington, D.C.-based Alpert & Associates. "There
have been some modest price increases," he said, "but then, they're
delivering more channels."

EchoStar is replacing its "Top 50" lineup with a
more expensive "Top 60" package this month.

"I'm not going to say that DBS hasn't
increased rates at all," Alpert said, "but the increases have been directly
proportional to what they're offering."

Executives from all three DBS platforms have said that they
don't expect to pass the programming costs on to their subscribers if ESPN increases
its fee to help pay for its new National Football League contract.

But absorbing programming-fee increases is not without its
risks to DBS companies that have yet to reach financial breakeven.

"We do have to become more efficient," conceded
Ergen, "and as we get more customers, we are more efficient."

"Our business model is different than
cable's," Wilkinson said. "Our cost structure is different. For us, much of
the infrastructure is the same for 10,000 customers or 2 million."

When asked about the possible fee increases from ESPN,
DirecTv president Eddy Hartenstein said, "Subscriber-acquisition costs are a much
greater market pressure for us than programming fees are."

Last month, Hartenstein said DirecTv's
subscriber-acquisition costs had risen to $400 per new customer.

Wilkinson, too, said PrimeStar's programming costs had
not increased as quickly as its costs to acquire new subscribers. But, he added,
"programming fees are not minor. They're significant. We're constantly
renegotiating and trying to get volume discounts."

As DBS companies continue to beef up their subscriber
numbers, volume discounts are likely to help them offset the cost of programming.
Wilkinson said volume discounts are different from each network. "You reach some at
the 500,000-subscriber milestone, others at 2 million and some at 5 million," he
said.

PrimeStar may see some further programming discounts once
it finalizes a deal to acquire 1.2 million C-band satellite customers from United Video
Satellite Group Inc. later this month.

The race to acquire new subscribers is not driven only by
hopes of volume discounts, of course.

"The whole strategy behind subscriber acquisition is
to accelerate market penetration," Alpert said.

And because increased market penetration is the primary
goal for all DBS companies, they're not in a hurry to scare off potential subscribers
with higher programming costs. And the last thing that they want to do is risk increasing
churn by alienating their existing customers with price increases.

"There's a threshold issue," said Jimmy
Schaeffler, chairman and CEO of The Carmel Group. "Some people will leave a service
if you raise it by just $1. They'll say, 'You're just like the cable
company, trying to woo me in with low prices and then later raising them.'"

The proposition that DBS can't raise its rates is not
necessarily true, said Howard Horowitz, president of Horowitz Associates Inc. in
Larchmont, N.Y. But, he added, "I don't think that they can raise their rates
and get new customers."

When faced with absorbing the company's programming
increases, Hartenstein said, "we try to improve our other costs, such as our
customer-service costs."

Hartenstein said he won't take the lead from his
fellow DBS providers when determining when to pass through or absorb programming
increases.

"Our subscriber doesn't give a hoot what the cost
of a Dish [Network] package is," Hartenstein said, adding that DirecTv is more
interested in what cable is doing because that's where it is most likely to find its
new subscribers.

Horowitz said cable companies have an easier time raising
rates because the inconveniences of DBS, as well as its upfront costs, make cable the only
real choice for a lot of consumers.

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