EchoStar Communications Corp.'s deal last week to secure
scarce high-power DBS spectrum takes News Corp. off the hook for a $5 billion lawsuit and
resurrects EchoStar's plans to create a 500-channel universe complete with local-broadcast
In a stock transaction valued at $1.25 billion, News will
shed its breach-of-contract suit, and EchoStar will gain control of the last 28 full-CONUS
(continental United States) direct-broadcast satellite transponders.
The other party in the deal, MCI WorldCom, won the 110
degrees west longitude orbital spectrum at auction in early 1996 for $685 million.
EchoStar will now go forward with its ambitious plans,
which include providing local-to-local channels to about 50 percent of the country, plus
high-definition television and data services, through a single, small dish.
A similar announcement by EchoStar and News' American Sky
Broadcasting Inc. last year was dubbed "DeathStar" by those close to the cable
industry. But cable reaction last week at the Western Show was more muted.
Questioned on the show floor last Thursday,
Tele-Communications Inc. chairman and CEO John Malone called the deal "very good for
Rupert [Murdoch, News' chairman] and very good for Charlie [Ergen, EchoStar's chairman and
CEO]." Malone added that it was not his place to oppose the license transfer.
According to a U.S. Department of Justice antitrust suit
filed earlier this year against PrimeStar Inc.'s plans to take control of the 28
transponders at 110, Malone was instrumental in convincing Murdoch last year that a News
deal with EchoStar would hurt News' relationships with its cable affiliates.
One DBS executive, who asked not to be named, said EchoStar
could be in a position to pass DirecTv Inc.'s subscriber count within five years or so.
And the deal solidifies DBS as a two-horse -- rather than three-horse -- race.
Bear Stearns & Co. analyst Vijay Jayant said he
believes that the deal allows EchoStar to create "the most powerful video platform in
the world." Wall Street loved the news, sending EchoStar's stock up 20 percent, to
$42.25 per share, before it fell a bit by last Friday morning.
While DBS analysts said the EchoStar/News deal will
significantly change the DBS landscape, it doesn't create quite the "DeathStar"
that was envisioned a year ago.
"It's more like 'DeathStar Light,'" said Steve
Blum, president of California-based Tellus Venture Associates. Last year's deal would have
merged EchoStar with an international multimedia empire and given the smallest U.S. DBS
company a huge influx of cash.
The new deal gives News a 30 percent ownership stake in
EchoStar, but it leaves Ergen with 87 percent voting control of the company. By many
accounts, that sole control is more valuable to the hands-on Ergen than cash.
"I think [Ergen] is much better off now than if the
deal had gone through the last time," said Mickey Alpert, president of Washington,
D.C.-based Alpert & Associates.
Alpert also believes that News had little choice but to
strike a deal with EchoStar in exchange for dropping the lawsuit.
"Charlie had a very good case," he said. "If
it went to trial, it would have been the global media mogul who wants to rule the world
against a country accountant."
In other terms of the deal, News will launch two high-power
satellites -- valued at $450 million, with insurance -- for EchoStar. And EchoStar also
gains from News a $100 million uplink facility in Gilbert, Ariz.
News granted EchoStar's Dish Network three-year
retransmission-consent agreements for all of its Fox Network owned-and-operated stations,
which could be a first step toward negotiating similar deals with other stations.
EchoStar also agreed to carry Murdoch's Fox News Channel.
And News gave EchoStar a worldwide order for 500,000 digital set-top boxes incorporating
News' NDS encryption technology.
The government could block the DBS-license transfer, but
there are early indications that regulatory agencies look favorably on the deal.
Federal Communications Commission chairman William Kennard
said in a prepared statement last week, "Consumers need more competition to provide
an alternative to cable," adding that the deal "could facilitate stronger
DBS-cable competition, depending on the specific business plans put forward."
DBS competitor DirecTv could contest the license transfer,
given the fact that the FCC once said that DirecTv would be prevented from owning
significant DBS spectrum at more than one orbital location. At the Western Show, DirecTv
president Eddy Hartenstein said the company would "wait and see" whether it
would file opposing comments with the FCC.
If given FCC and DOJ approval for the license transfer,
EchoStar expects to see the two new satellites launched next year. The company's core Dish
Network programming would be transitioned to 110 degrees, leaving the company's 21
transponders at 119 degrees free for additional services.
EchoStar would need to reposition its current customers'
dishes. It also expects to introduce a new antenna that could receive signals from both
110 and 119.
PrimeStar president Carl Vogel said his company has filed
comments with the FCC contending that PrimeStar should now have access to all 32
transponders at 119. PrimeStar has plans to launch a high-power service at 119, but it
currently controls only 11 transponders there.
On a conference call with reporters last Monday, Ergen
expressed confidence that the DOJ would approve the transaction.
"They've seen this deal a number of times before, from
us and from PrimeStar," he said.Ergen was in Washington, D.C., to lobby for the
DBS-license transfer, which faces regulatory approval, and for changes in copyright laws
that would allow Dish Network to market its local-to-local channels to a greater portion
of the population.
Also as part of the deal, MCI and EchoStar have agreed to
bundle Dish Network programming with MCI's telephone service, although details have not