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DBS Ops Tout New Gear, Remain Must-Carry Wary

Las Vegas-The direct-broadcast satellite industry focused on its future last week at its principal annual convention here.

But optimism that a new generation of set-top receivers will usher in an era of satellite-delivered broadband Internet access was tempered by an undercurrent of concern over federal must-carry rules that threaten channel capacity.

Nevertheless, EchoStar Communications Corp. chairman Charlie Ergen predicted that personal recording devices built into new set-tops and DBS-offered high-speed Internet access would "revolutionize" the industry.

"It appears to me that the technology is there and the people are in place. It's just going to take some execution," Ergen said.

Those new services, along with the ability to offer local programming, will add 3.5 million new DBS subscribers this year, compared with 1 million for cable, Ergen forecast.

Most analysts agreed that DBS operators were poised to use broadband services to take control of rural markets untapped by cable or the telcos.

"First of all, it's DBS' reach," Paul Kagan Associates Inc. senior analyst John Mansell said. "It'll go places in the country that can't get cable or DSL [digital subscriber line], or both."

And unlike cable modems, which can only be offered in areas where cable operators have upgraded their networks, DBS-offered Internet access will benefit from the industry's ability to market the service nationwide, Mansell added.

Moreover, DBS can cash in on the perception that speeds or cable modems diminish as the number of subscribers on the system increases, he said.

Jimmy Schaeffler, chairman of The Carmel Group, a California-based research outfit, said cable will lose 500,000 customers to DBS this year because only a handful of cable systems are capable of competing with satellite.

Moreover, he predicted that analog cable "will be dead" in five years, killed off by DBS and digital-cable offerings.

"If cable companies aren't aggressively upgrading, they're going to be in sorry shape," Schaeffler said.

But looming over the Satellite Broadcasting & Communications Association's 2000 National Satellite Convention & Exposition were concerns about must-carry rules included in last year's Satellite Home Viewer Improvement Act.

As written, the law that allows the satellite industry to offer local channels also mandates that by 2002, DBS operators must offer every local channel in each market they serve.

The must-carry rules have been the subject of recent filings at the Federal Communications Commission by DirecTV Inc., EchoStar and the SBCA.

In a keynote address, DirecTV chairman Eddy Hartenstein said his company was urging the FCC to establish rigorous qualifications that local channels must meet in order to be carried on DBS systems, and that operators not be required to carry duplicative channels.

Otherwise, markets with a large number of local channels will eat up enough channel capacity to offset the benefits of the local-into-local provisions in the law, he said.

"The greater the must-carry burden the FCC imposes, the fewer markets we will be able to serve with local channels," he added.

SBCA president Check Hewitt was even more blunt, calling the must-carry mandate "wasteful."

New York, for example, has 27 broadcast channels, many of them offering the same programming, he said. Under the law, DBS operators would have to carry all of them at the expense of offering local channels in another market.

"It's unfair for people in Richmond, Virginia, or Hartford, Connecticut, not to get their local channels so that people in New York can get 27 channels," Hewitt said.

Although Hewitt said the SBCA is considering all options, including litigation, Hartenstein and Ergen declined to say whether they're prepared to go to court, where experts believe must-carry is vulnerable on constitutional grounds.

"There are some advantages to challenging the must-carry obligation right now," Schaeffler said. "There's the argument that it's ripe for challenge because if it goes to the U.S. Supreme Court, there is a good chance that it would be overturned. The court's makeup and the telecom environment have changed enough so that a different decision is clearly possible."

In an unrelated matter, Hartenstein went out of his way to address what he called a perception that DBS-subscriber growth had slowed, noting that DirecTV added 857,000 subscribers during the first half of the year, a 28 percent increase over the comparable period a year ago.

Sources said the notion that consumer interest was waning was the result of DirecTV only adding 130,000 new customers in May after picking 180,000 the previous month.

An analyst's downgrade of EchoStar stock after BellSouth Corp. announced plans for a new direct-to-home service in the Southeast and EchoStar's shifting to quarterly subscriber-growth reports added to the perception.

"There was a suspicion that they had something to hide," Carmel Group vice president of business development Sean Baddington said. "But it's more that Charlie's way of operating has always been to keep as much information from the competition as possible. I strongly believe they're going to report good, solid numbers."

In other news at the conference, Pegasus Communications Corp. reported that it would acquire a list of all former PrimeStar Inc. customers in its service territory that DirecTV has not managed to convert to its high-powered platform.

Pegasus will pay DirecTV $300 for each customer it converts to its service, and it will be responsible for the costs associated with converting the subscribers. Pegasus serves 1.2 million DBS subscribers in 14 states.

And EchoStar unveiled the "Dish DVD Model 5422," the first satellite-television receiver with a built-in DVD player. The equipment allows consumers to watch their favorite DVD movies, as well as Dish Network programming.