Street Sanctions DBS Consolidation

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Los Angeles -- Several direct-broadcast satellite analystsgave their collective thumbs-up last week to the recent industry consolidation.

Later this year, the industry will be pared down to onlytwo major competitors -- DirecTV Inc. and EchoStar Communications Corp. -- if theirrespective merger deals go through as planned.

While some observers have decried the consolidation asanti-competitive, the consensus at The Carmel Group's conference here was that theremaining players would pick up more subscribers over the next few years than previouslyprojected for the industry.

"Two players will be much better for competition goingforward," said Marc Crossman, vice president at J.P. Morgan & Co.

One reason why DirecTV and EchoStar will be betterpositioned to compete against cable and each other following the consolidation is becauseeach will gain access to additional high-power DBS bandwidth as their deals close.

DirecTV stands to gain transponders at the 101 and 110degrees west longitude spectrum from U.S. Satellite Broadcasting, as well as spectrum at119 degrees from a separate deal with Tempo Satellite Inc.

And through a deal with News Corp.'s American SkyBroadcasting Inc., EchoStar will win considerable spectrum at 110 degrees.

That additional spectrum will allow both companies to offernew services, including high-speed-data delivery, interactive television andhigh-definition television programming.

"Channel capacity is growing by 100 to 200channels," said Bob Berzins, senior vice president for Lehman Bros. Inc., giving eachcompany "an incredible prospect for new pay and niche services."

Michael Smith, chairman and CEO of Hughes ElectronicsCorp., DirecTV's parent, said a key to the company's financial success is tocapitalize on its recent acquisitions "and to take our challenge to cable to a newlevel."

He added that with new interactive-television services,DirecTV will offer a TV-based portal for subscribers.

Smith said he wanted to be careful to manage the hype whentalking about new interactive services, "because we're talking evolution, notrevolution."

Following the introduction of interactive-televisionservices from Wink Communications Inc. and TiVo Inc., DirecTV plans to introduce a productlate this year that combines a DBS receiver with a full Internet browser and hard drive,Smith said. He added that the new hardware will help to drive such services as homebanking and video-game caching.

Crossman said he's yet to see a good data strategyfrom DBS that matches what the cable industry can do with high-speed modems.

"I'm not saying that it can't be done,"he said, "but I haven't seen it yet. It's an important issue because youcan generate extra revenue per subscriber every month."

Smith predicted that Hughes would be able to offer two-waybroadband Internet access by the year 2002 through new Ka-band satellites. Over time, headded, the new technology would allow inexpensive two-way video-phone calls.

Regional Bell operating companies may choose to push DBSservices aggressively once AT&T Corp. starts promoting bundled services, predictedDoug Shapiro, vice president at Deutsche Morgan Grenfel.

On a separate panel, EchoStar chairman and CEO CharlieErgen said that if name-brand communications companies like Microsoft Corp. and the BabyBells were smart, they would partner with EchoStar today to bundle video services, beforeAT&T has a chance to package voice, video and data under its own powerful brand.

Shapiro said it's unrealistic to think that theAT&T/Tele-Communications Inc. deal won't have an impact on the DBS business, buthe believes that cable and DBS can coexist.

Lou Kerner, vice president at Goldman Sachs & Co.,predicted that the DBS industry could reach 18 million U.S. homes by 2005, "and theycan do that without hurting growth to cable."

DirecTV president Eddy Hartenstein called DBS "theunderdogs in this business," not long after saying that the company was thefourth-largest multichannel-video provider in the country.

Cable Telecommunications Association (CATA) president SteveEffros, however, warned that DBS won't be able to count on its "underdog"status forever.

"The DBS industry is not a new entrant anymore,"Effros said. "This is not being lost on Washington."

Effros wondered what would happen at the end of the month,once headlines tell consumers that satellite has cut off service to 2 million customers.He was referring to the pending cutoff of distant-network signals to illegal customers whowere signed up by PrimeTime 24. "Service blackouts equal headlines," Effrossaid.

Others tried to downplay the potential damage of thedistant-signal cutoffs, saying that it's not yet certain that the cutoff date will beobserved. But no one is sure yet how much a signal shutoff could hurt future DBS sales.

Wall Street analysts didn't envision many obstacles tofinancial success for DirecTV and EchoStar -- which are nearing breakeven -- but they didname some potential hurdles, such as catastrophic satellite failures or future problemswith program access.

The companies will also have to find a way to execute theirbusiness-expansion plans -- launching new satellites, repointing dishes and marketing newservices.

Analysts warned DirecTV and EchoStar to keep their eyes ontheir primary competitor -- cable -- rather than on what each DBS company is doing toconvert PrimeStar Inc. customers to their service. DirecTV reached a deal last month toacquire PrimeStar's assets.

Ergen defended his attempt to win PrimeStar customers overto EchoStar with a free-hardware offer, despite some claims that churn is likely to go upif new subscribers don't have an ownership stake in the system.

"With PrimeStar, they required a pulse," Ergensaid. "We require a pulse and a job."

Ergen added that true DBS service is so good that churn hasbeen less of a factor for EchoStar and DirecTV than it has for cable or PrimeStar.

And Kerner believes that new interactive-televisionservices slated for introduction later this year can help DBS to keep churn in line.

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