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Merging Interests for Satellite Players

Liberty Media chairman John Malone and EchoStar Communications CEO Charlie Ergen appear to be teaming up not only with each other, but with another telecommunications maverick, cellphone entrepreneur Craig McCaw.

The two deals indicate satellite rivals DirecTV, which Malone will soon have a stake in, and EchoStar were aligning on several fronts. First, Liberty and EchoStar were readying a joint bid for Intelsat, a commercial-satellite giant, according to The Wall Street Journal.

Then, DirecTV and EchoStar, owner of Dish Network, announced that they both had done distribution deals with McCaw's Clearwire, a growing provider of high-speed wireless Internet service that currently counts 258,000 subscribers.

BUILDING A BUNDLE

The wireless Internet deals will allow all three companies to offer a triple-play bundle of video, voice and data in Clearwire's current and future markets — and to better compete with cable.

Liberty, EchoStar and Intelsat declined to comment last week. And as of press time Friday, there was no indication whether Liberty and EchoStar would actually proceed with a joint bid in the auction for Intelsat, the owner of the world's largest fleet of fixed satellites. Offers were expected to range from $4.5 billion to $5.5 billion.

Just the prospect of such a bid sparked much disagreement among media analysts about whether Intelsat would offer DirecTV and EchoStar real cost-savings synergies, such as shared satellite capacity and spectrum; or if the two companies are simply looking for a chance to diversify into another business, wholesale satellite service, with solid cash flow.

EchoStar has been on the prowl for assets, reportedly making a $2.1 billion offer for Ion Media Networks earlier this year, Sanford C. Bernstein analyst Craig Moffett said.

Analysts warned that the Clearwire deal will take a while to have any real effect on DirecTV and EchoStar, but that it was another leg in the two satellite companies' multipronged efforts to combat cable's triple play. For example, DirecTV and EchoStar already each have distribution deals with a wireless Internet service, WildBlue Communications, for rural markets.

“As of right now, it's [the Clearwire deal] a press release and the formation of an arrangement,” said Bruce Leichtman, president and principal analyst of Leichtman Research Group. “You can't think of it as an overnight grand slam.”

He added that Clearwire is “very much a startup. … In any market, they're a third distant player.”

But Jimmy Schaeffler, chairman of The Carmel Group, a satellite industry consultant, said the Clearwire distribution agreement was significant.

BIG-NAME PLAYERS

“It's a very big deal for both EchoStar and DirecTV,” said Schaeffler, who has advised both EchoStar and DirecTV. “Now you're adding Craig McCaw to the mix … he's another guy who left the terrestrial business to get into satellite big-time. You've got Craig McCaw, John Malone and Charlie Ergen, and that is just a remarkable combination.”

McCaw founded Clearwire in 2003, and has served as its chairman since then. McCaw apparently has other deals cooking: The Journal reported last week that Clearwire and Sprint Nextel were considering a partnership.

Whether or not Liberty and EchoStar do bid for Intelsat, the fact that they reportedly considered a joint bid — in addition to the Clearwire agreement — indicates that Malone and Ergen have gone beyond just talking about working together on some fronts, but are actually doing it, according to analysts.

Moffett issued a report noting that the two separate deals “suggest a cozier working relationship” between DirecTV and EchoStar, as they look to team up to reduce their costs and gain a strategic advantage over cable.

“While the two companies have long talked of a joint wireless venture, the announcement of the Clearwire deal marks a new milestone in the alignment of their interests,” Moffett wrote. “And the joint participation of Liberty and EchoStar in the Intelsat bid clearly indicates that those two companies are working together on at least one front, a sign that further cooperation is possible after Liberty takes control of DirecTV later this year or early next.”

Jeff Wlodarczak, a Wachovia analyst, in his report outlined the reasons why Intelsat would make sense for Liberty/DirecTV and EchoStar, including “access to Intelsat's significant in-orbit sat capacity for additional services and possible long-term expense reduction” as well as its “international capacity providing new growth opportunities.”

Todd Mitchell, an analyst at Kaufman Bros., said, “More [satellite] capacity is always better than less.”

But Spencer Wang, a Bear Stearns analyst, was not very bullish on the benefits of the potential Intelsat deal to DirecTV and EchoStar.

“The [Journal] article argues that the strategic rationale is to reduce operating costs,” Wang wrote. “However, our initial take is that cost savings are fairly limited as Intelsat's U.S. assets are primarily C-Band assets, not Ku — the band, which DBS primarily uses to broadcast video services. … Other benefits theoretically include revenue diversification away from an increasingly competitive consumer video business and the high cash-flow generation of Intelsat.”

Moffett wrote that there might be the opportunity, via Intelsat, for DirecTV and EchoStar to share costs on local signal-backhaul and to share transponders for HD channels. But there are operational challenges to those possibilities, he noted.

In an interview, Moffett said, “The reality is the opportunity for synergies is small to begin with.”

April Horace, a Janco Partners analyst, concurred about the limits on the benefits and cost-savings Intelsat could create for EchoStar and DirecTV. “I'm having a hard time connecting those dots,” she said.

Intelsat's customers include programmers such as Home Box Office, as well as Comcast. But Mitchell doesn't think Liberty or EchoStar would try to sever Intelsat's relationships with any cable companies.

While Mitchell said that he didn't think “the cable industry would be too thrilled about them [Liberty/DirecTV and EchoStar] getting a hold of this asset,” he doesn't think that under such ownership Intelsat would “do anything proactively to hamper cable's business.”

He added, “I don't think there's any way DirecTV and Echo could say, 'OK, we're cutting you off.' ”

Comcast declined to comment.

Media analysts were divided about whether Liberty and EchoStar would ever be able to get regulatory approval to buy Intelsat, since the acquisition would create a satellite behemoth with global reach.

PRELUDE TO MERGER?

And last week's news renewed speculation that DirecTV and EchoStar's moves are a prelude to their merger down the road.

“It takes Charlie Ergen and John Malone that much closer to the ultimate merger, which is EchoStar-DirecTV,” Schaeffler said.

Federal regulators in 2002 rejected a merger involving the two satellite services, as harmful to competition.

At a Janco conference earlier this year, Liberty CEO Greg Maffei said that Liberty is carefully watching whether the $13 billion Sirius Satellite Radio-XM Satellite Radio merger gets federal approval, according to Horace. And that, no doubt, will help Liberty decide its course of action when it gains ownership of DirecTV, and ponders any attempts at merging with EchoStar.