DBS Players Eye Capacity Contingency Plans

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Direct-broadcast satellite companies are working to
reassure the investment community that recent satellite anomalies should not disrupt
service.

The outreach to Wall Street comes on the heels of several
technical problems that could affect the working life, channel capacity and redundancy of
satellites in orbit.

Early this summer, DirecTv Inc. reported that a processor
on its five-year-old DBS-1 satellite, the first of three launched to 101 degrees west
longitude, had failed, leaving the satellite without a backup.

EchoStar Communications Corp. recently decided to position
its newest bird, EchoStar IV, at 148 degrees west, instead of its full-CONUS (Continental
U.S.) slot at 119 degrees. In testing the satellite, launched early this spring, EchoStar
discovered deployment problems with some of its solar panels. As a result, EchoStar IV has
less lower channel capacity than anticipated at launch.

EchoStar had hoped to use the additional capacity to beef
up programming as early as this month. Instead, the company will enhance its compression
technology over time, and will postpone the launch of such recently signed services as The
Outdoor Channel.

A fully functioning EchoStar IV at 119 would have allowed
the company to target Alaska and Hawaii with a package of about 80 channels. As an
alternative, EchoStar will use its new relationship with Loral SkyNet to offer a less
robust package to those states.

EchoStar also discovered an unrelated anomaly on its
EchoStar III satellite, currently positioned at 61.5 degrees west. A problem with certain
electric power converters could shorten the service life of the satellite if operated at
ultra-high power. But EchoStar chairman and CEO Charlie Ergen told reporters at last
month's Satellite Broadcasting & Communications Show that if operated at the
120-watt high-power mode, "EchoStar III might not be a loss at all."

Hughes Network Systems' DirecPC service was affected
somewhat this spring when a PanAmSat satellite, Galaxy IV, went out of service. DirecPC
uses multiple satellites to service its high-speed Internet customers. The company moved
whatever customers it had at G-IV to the Galaxy III-R satellite.

Even PrimeStar Inc. does not remain untouched by satellite
problems. Its sister company, Tempo Satellite Inc., has still not taken full possession of
its high-power bird parked at 119 degrees because of certain technical liabilities. The
satellite remains unused, pending government approval to launch a commercial high-power
service.

Lou Kerner, vice president at Goldman Sachs, admitted that
Wall Street is keeping an eye on satellite anomalies.

"Because the problems happened at the same time, it
did have more of an impact," Kerner said, adding, "it's probably more
coincidental than anything."

Kerner said the impact from the recent technical problems
is more likely to influence investor sentiment than the various companies' actual
service operations. He said it's not fair to speculate how the industry would suffer
if any of the DBS companies were unable to service its customers altogether, because
that's so unlikely to happen.

Still, even as a perception problem, the issue could do
serious damage if not properly addressed. In order to fund expansion, the DBS industry
seeks to raise a lot of money in a tough market.

And Kerner suggested that recent anomalies could send
insurance rates soaring.

"The risk of complete failure is very modest,"
said Vijay Jayant, associate director at Bear Sterns.

While that should be reassuring for DBS subscribers,
it's not necessarily enough to appease investors. Wall Street wants to know that a
newly launched satellite will not only function, but that it will live up to its intended
design, Jayant said.

EchoStar said it would file insurance claims on EchoStar
III and IV for $200 million. But at the recent SBCA show, Ergen said, "We don't
expect the claim payments will come anywhere near to the $200 million we asked for."

DBS companies have drawn up contingency plans so that their
subscribers would still receive service in the unlikely event of an outage.

If the DBS-1 satellite that serves DirecTv and U.S.
Satellite Broadcasting customers fails, the companies would shift some of the programming
currently on DBS-1 onto the other two satellites in orbit. Because there's not enough
capacity to handle all the channels, however, some programming would have to be dropped.

DirecTv president Eddy Hartenstein said his intent is to
"preserve the genres and the essence of the programming." He admitted that
DirecTv and USSB would probably lose some of the repeat showings on its premium and
pay-per-view movie channels.

"We might preserve HBO and Showtime, but maybe not all
their channels," said Hartenstein.

EchoStar could move either EchoStar III or EchoStar IV to
fill in at 119 if EchoStar I or II fails. EchoStar already plans to launch another
satellite within the next three years.

PrimeStar could shift programming for its medium-power
service to another GE satellite in orbit, said PrimeStar president Dan O'Brien. It
would take about two days to move the satellite from 87 degrees to 85 degrees, he said.

The company has not yet detailed its satellite plans for
the high-power service it hopes to launch if given the government go-ahead. But PrimeStar
already has access to several yet-to-be-launched satellites.

Although DirecTv is most likely to lose channel capacity in
the event of a total satellite failure, it also boasts the most channels today. If DBS-1
fails, the service would move from 200 channels to about 140, aggregated between DirecTv
and USSB.

"It wouldn't be difficult to drop 40 channels off
the existing load even in a way consumers would hardly notice," said Steve Blum,
president of California-based Tellus Venture Associates.

Blum predicts the barker channels would go first, as would
recently added channels that are not yet pulling in viewers.

USSB is more vulnerable to a loss of DBS-1, analysts said,
because DirecTv controls all the transponders at DBS-2 and DBS-3.

"USSB is probably in the worst shape of all, with no
backup or contingency plan," said Blum. "They'd have to go hat-in-hand to
DirecTv, and that's not a position they want to be in."

If DirecTv launches a fourth satellite, USSB has the rights
to additional capacity there. But neither Hartenstein nor USSB president and CEO Stanley
E. Hubbard will say when a fourth satellite would be launched.

"We've always said we'd like to see a fourth
satellite launch," said Hubbard. "It would double the power and give us
increased capacity."

But Hubbard said USSB does not plan to launch such a
satellite on its own.

Typically, it can take 18 months or more to build and
launch a new bird. Some analysts predict that with DirecTv's close ties to parent
company Hughes Electronics Corp., it could pull some strings and get a satellite launched
more quickly if needed.

If all this talk of satellite launches and possible
technical failures scares away some investors, Kerner said the issue should be put in
perspective.

"The real focus and health of those companies in the
long term is based on subscriber growth," he said. "And that has gone up."

When DBS companies report satellite anomalies and the stock
prices take a dip, Kerner said, "that creates good buying opportunities."

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