Dolan's Folly?

Skeptics, including most of Wall Street, consider it Chuck's latest folly. Then again, cable-industry veterans know it's a mistake to underestimate him.

Either way, last week Cablevision Systems Corp. chairman Charles Dolan took the crucial next step in his controversial plan to start a direct-broadcast satellite service, Rainbow DBS.

Cablevision's satellite — a $250 million Lockheed Martin Corp. bird named Rainbow 1 — launched at Cape Canaveral, Fla., last Thursday. Dolan and a group of Cablevision staffers were on hand to witness the lift-off.

Even with the satellite now spinning in orbit, there remains speculation that Cablevision ultimately will shelve its plans for Rainbow DBS and instead sell the spectrum and licenses.

Speaking from Florida last week, Dolan denied such talk. In fact, he announced that Cablevision will start selling its DBS service commercially on Oct. 1 — and unveil all the details about it then.

Dolan's plans to debut a direct-to-home satellite service that will compete against not only his colleagues in the cable industry but two solidly entrenched DBS providers — DirecTV Inc. and EchoStar Communications Corp. — have continued to raise eyebrows and spark speculation about his real motives.

"I'm still somewhat clueless and unclear about what their intent is," said Matt Polka, president of the American Cable Association, a lobbying group for independent cable operators. "You have one of the pillars of the cable industry now getting into DBS to do what, compete against cable operators?"

Dolan: we're ready

Dolan readily acknowledged that his Rainbow DBS plan has many naysayers and critics, and has been the subject of blistering reports by stock analysts. But Dolan said he's hoping to eventually win them over.

"We have certainly seen the reports," Dolan said. "There are not a lot of optimists around for what we're doing. We hope to earn a little more support as we go along. But we have spent more than a decade preparing for this really. And we certainly did not do that with the idea we were going to build a satellite and then sell it."

Last week, Dolan finally did come forth with some specifics about his DBS service, like the fact Cablevision will offer it in the New York market, where its own cable systems are concentrated. And Rainbow DBS, with its heavy emphasis on HDTV, will use digital rooftop antennas to provide local TV-station signals, rather than offering local-to-local via satellite.

"We don't think that's [local-to-local] practical anymore," Dolan said.

Cablevision tried to appease Wall Street's doubts about its plans back in June, when it announced it would spin off the DBS operation into a separate public company.

Billion's a benchmark

Arguing that satellite is not as capital-intensive as cable, Cablevision expects Rainbow DBS to have 1 million subscribers — and hit breakeven — before the company has invested $1 billion in it.

But that investment benchmark is fast approaching.

By the end of the year, Cablevision would have contributed more than $900 million to the DBS venture, including about $500 million already spent on deploying and developing the satellite and a $450 million funding pledge at the time of the proposed Rainbow DBS spin-off.

Cablevision proposed the DBS spin-off — a tax-free exchange to existing company shareholders — in part to make it easier for the venture to raise additional money and to lessen the burden of Cablevision stockholders.

Cablevision has said that it expects the spin-off to be completed later this year, but the recent federal investigation into accounting practices at its AMC programming unit could cause a delay.

Regardless of the spin-off's status, Dolan's DBS plan remains immensely unpopular with Wall Street.

Analyst: 'low odds'

"It doesn't make sense," said Merrill Lynch analyst Jessica Reif Cohen. "I don't know why they want to start a third competitive satellite. News Corp. didn't want to do it, and they've got more experience than anyone."

Just last week Richard Greenfield, an analyst at Fulcrum Global Partners LLC, issued a report on the satellite launch.

"Our view is that Rainbow DBS has extremely low odds of success as a third entrant into the DBS landscape [with cable already an entrenched competitor], unless it is targeted at a niche business such as HDTV," Greenfield wrote. "In that light, we would have preferred Cablevision to shut down the business and sell it pre-launch."

Citigroup Smith Barney cable analyst Niraj Gupta was equally skeptical, adding that the DBS venture will likely take well more than $1 billion to get to profitability. What's more, Cablevision has been reluctant to discuss the economics of the venture, such as how much it intends to spend on customer-premises equipment, marketing and so forth.

Dolan would only say Rainbow DBS would not be subsidized by the cable operation.

"It's tough to tell," Gupta said. "We all know that it took DirecTV 3-plus million subscribers to get to cash-flow breakeven. The cost of equipment was a lot higher back then, and presumably he can get equipment costs from Motorola to be very attractive.

"The other issues about scale, distribution, customer service, all the things that go into putting together a company in the communications industry — back office, billing, the whole nine yards, is something the company has to consider," Gupta added.

SkyCable recalled

While the entrepreneurial Dolan has struck gold with pioneering ideas like Home Box Office, regional sports networks and regional news networks, he and Cablevision have had their failures as well.

For example, Dolan's initial foray into the DBS business in the 1980s, the SkyCable venture, went belly up in 1991. More recent expansion efforts outside of cable — such as the purchases of The Wiz consumer-electronics chain and Clearview Cinemas — were washouts.

Still, many say Cablevision's overall track record speaks for itself.

"The Dolans are incredibly smart people and they have great people working for them," said Mark Cuban, chairman and president of HDNet. "They are entering the market at the right time. It's early enough that they can get a jump on the retail market and provide a nice alternative-delivery system for consumers.

"I never doubt the Dolans," Cuban said.

What Wall Street and critics see as Cablevision's obstacles in the DBS arena, Dolan prefers to consider advantages.

He argued that DirecTV — in which Rupert Murdoch's News Corp. is in the process of acquiring a controlling interest — and EchoStar are saddled with old technology, in terms of their satellites and set-tops, which limits what they can offer consumers.

"I have all the respect in the world for Rupert, but he's putting a lot of money into a satellite system that is essentially obsolete," Dolan said.

As the latest entrant in the market, Cablevision has the benefit of using a powerful satellite with state-of-the art technology, including MPEG-4 [Moving Pictures Expert Group] compression, that will allow it to beam up to 468 channels — versus 200 for DirecTV or EchoStar — to 18-inch rooftop dishes, according to Dolan.

Custom content

And with its satellite's 22 spot beams, Cablevision can adjust and customize, by content or geographically, Rainbow DBS's programming offerings. It will reach 80% to 90% of the country.

Of his dominant DBS rivals, Dolan said: "What is cited as their advantage is really their problem. They've got 21 million subscribers out there equipped with MPEG-2 boxes that cannot be upgraded. They can't take bandwidth away from MPEG-2 without depriving those people of service.

"So in order to use their capacity to provide HD and other expanded channel requirements, they have to go out and get new capacity, or they have to require all of their subscribers to upgrade their boxes."

EchoStar declined to comment, but DirecTV disputed Dolan's criticisms of its service.

"Personally, I'm shocked they are even going into the business," DirecTV president Roxanne Austin said. "At the end of the day, they have to do what they feel is right for their shareholders.

"But I don't see it [Rainbow DBS] as a huge threat," Austin said. "It's a regionally based service with a cable owner. As we look at cable, cable continues not to operate the quality of service that we operate."

Austin also denied that DirecTV will have to do any major switch out of its boxes, or that the MPEG-4 technology would give Rainbow an edge.

"They're trying to do a technology with an existing satellite piece of spectrum," Austin said. "We have a much broader set of spectrum assets to pull from. They don't understand where we are or what our technology is obviously if they're making those kind of statements."

Cable competitor

Dolan doesn't feel any compunction about competing with both his cable-operator friends and DBS rivals alike for subscribers for Rainbow DBS.

"The way we look at it is, we're in the business of delivering a program service to the home," he said. "We deliver video. We deliver data. We deliver telephone. We're not in the cable business. And we're not necessarily in the satellite business. We're in the business of providing a service to the home by whatever delivery means is most efficient."

That's not how the ACA's Polka sees it. Polka said Dolan will "pillage" subscribers from independent cable operators, "including some of his close brethren, like a Bill Bresnan, who's back in the industry, or a Jerry Kent, or other of our members."

But Cablevision might not always be in the cable-system business. Time Warner Cable has long been considered a potential buyer of Cablevision's systems. If that happened, Cablevision would still own a distribution outlet for its networks, like AMC and We: Women's Entertainment, via Rainbow DBS.

Dolan said Rainbow DBS will be offered in the New York metro area, where the MSO Cablevision has its huge cluster of cable systems.

"What we're going to be offering our subscribers in New York is a comprehensive service," Dolan said. "You will be able to buy cable service, you'll be able to buy satellite service, or a combination of the two."

Jimmy Schaeffler, chairman of research and consulting firm The Carmel Group, acknowledges that Cablevision and Dolan face an uphill battle. But he thinks it's possible they can beat the odds with Rainbow DBS.

"It's truly a challenge," he said. "But at the same time, if you bring something to the consumer, even a limited sphere of consumers … and it's different enough … you might be able to create something that's pretty damned good."