PrimeStar Faces Life with Delays - Multichannel

PrimeStar Faces Life with Delays

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Despite delays in its roll-up and the move to high-power
direct-broadcast satellite service, PrimeStar Partners L.P. is trying to conduct business
as usual.

One sign of that was the new, multimillion-dollar ad
campaign that the company launched during the Super Bowl.

Daniel O'Brien, incoming president of PrimeStar Inc.
(once the roll-up from the MSO-controlled partnership into a publicly traded company is
completed), acknowledged last week that the company is working hard to keep employee
morale up and to correct some misconceptions about the roll-up and the move to high-power.

Even if the Federal Communications Commission continues to
delay the decision-making process for the license transfers of high-power DBS spectrum at
119 and 110 degrees west, PrimeStar could still improve its business model by moving
forward with the roll-up.

'In no way is the roll-up contingent upon the move to
high-power,' O'Brien said.

Returning the focus to PrimeStar's current
medium-power satellite service 'has become a rallying point internally,'
O'Brien said. 'We have almost 2 million customers at our medium-power business
today.' Whatever happens with high-power, he added, 'we know that we have that
business, and we will revitalize that business.'

The company is taking these steps amid slumping sales and
analyst opinion that the delay in receiving government approval for the high-power move is
damaging the company.

'It's hurting their management focus and marring
their record in the industry,' said Barbara Sullivan, president of B.G. Marketing
Inc.

Programmers looking for carriage on a DBS system, for
example, may think that there's no point in approaching PrimeStar now.

'People are back-burnering them prematurely,'
Sullivan said. 'If PrimeStar is being viewed as a company that really can't
negotiate deals, that hurts them.'

Without a decision from the FCC, PrimeStar is unsure of not
only whether it will be granted access to high-power spectrum, but also of how many
channels it will have available for such a service. And without that go-ahead, it's
hard for PrimeStar to make firm deals with new dealers. That hasn't kept the company
from trying, however.

'We went to the Consumer Electronics Show, and we have
every major retailer interested in distributing our product today,' O'Brien
said. 'The demand is overwhelming.'

Timing is a critical factor in negotiations with
consumer-electronics retailers. Although the crucial fourth-quarter selling season is just
behind the industry, it's not too soon for most retailers to be thinking ahead to
next fall.

'Obviously, nobody wants to add a new product line in
the middle of Christmas,' said Mel Hunger, executive director of retail buying group
Key America. If the offer from PrimeStar made selling the new hardware profitable enough,
he added, many dealers might make room for the product anyway.

'Dealers are starting to make those product decisions
now,' said Steve Blum, president of DBS consultancy Tellus Venture Associates.
'Obviously, by Memorial Day, crunch time hits.'

O'Brien said PrimeStar would need a decision in the
March or April time frame in order to meet a launch window for its satellite at the 110
orbital slot. Tempo Satellite Inc. already has a satellite in orbit at 119, but it only
has access to 11 transponders there.

Missing the launch window could delay PrimeStar's
service launch indefinitely. 'A lot of the items in the timetable are cumulative in
scope,' O'Brien said. PrimeStar would need to pay for another launch window and
wait at the end of the line. 'We do have some options there,' he added.
'You can always attempt to accelerate a launch by paying money to buy somebody
else's window.'

PrimeStar has heard from national retailers that are
interested in selling -- and not just leasing -- the medium-power hardware, according to
O'Brien, who added that until the roll-up is complete, there is no single, national
infrastructure to support such distribution.

O'Brien said he expects the move to high-power to go
smoothly with RadioShack because the retail chain already has a relationship with
PrimeStar. RadioShack executives were traveling at press time, and they could not be
reached for comment, but, in the past, they have claimed success with both PrimeStar and
its competitor, the Digital Satellite System.

Other national retailers contacted for this story have not
committed to PrimeStar's high-power service, which would offer an 18-inch dish
similar to those found with DSS and EchoStar Communications Corp.'s Dish Network.

Chuck Cebuhar, vice president and general manager for Sears
Roebuck & Co., said he has had no talks with PrimeStar to date. And a spokeswoman for
Best Buy Co. Inc. said the retailer has made no decision on PrimeStar at this point.

O'Brien said that once the roll-up is complete,
PrimeStar will be in a better position to drive subscriber acquisition and reduce churn
for its medium-power business. PrimeStar will then start selling its medium-power hardware
nationwide for $149 (after a $50 rebate) to new customers, and for less to existing
subscribers.

The buyout program will allow customers to pay $99 to $129
(depending on how long they've subscribed) for a set-top box. In exchange, customers
will eliminate their monthly equipment-rental fee of about $7 per month.

'From our perspective, it's quite clear that
those who buy the hardware have a lower propensity to churn,' O'Brien said.

The FCC intends to review both license transfers -- for 119
from Tempo and for 110 from News Corp./MCI Communications Corp. -- together. O'Brien
said PrimeStar will dispose of the spectrum at 119, if requested, in order to gain the
license transfer for 110. But the company would 'absolutely not' give up the 119
spectrum unconditionally in the hopes of speeding up the decision-making process, he said,
and it doesn't plan to simply hand the spectrum back to the government.

'[A total of] 11 full-CONUS [continental United
States] slots are of great value,' he said, and PrimeStar would seek to sell off the
rights.

According to senior FCC staff members, the PrimeStar
application has not reached the commissioners' offices for a decision.

'Nothing's been circulated on the eighth
floor,' a senior FCC aide said, referring to the floor where the five FCC
commissioners keep their offices.

'We're doing our homework on what's involved
with the applications and what the competitive effects would be,' said another senior
FCC aide.

FCC sources said they were unaware whether the Department
of Justice -- which has opposed cable-operator entry into the DBS market in the past --
was seeking structural changes in the PrimeStar/News combination as a condition for the
merger approval.

According to O'Brien, neither PrimeStar nor News had
been approached by the government about the possibility of a consent decree, which would
set down conditions for the license transfer.

Over the past few weeks, O'Brien said, the DOJ has
been conducting depositions surrounding PrimeStar's deal with News.

Ted Hearn contributed to this story.

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