Skip to main content

PrimeStar Board Backs Business

PrimeStar Inc. quieted rumors that it would sell off its
subscriber base when it announced last week that its board of directors has agreed to move
forward with its medium-power satellite business.

The company also said it plans to seek new capital to
launch a high-power direct-broadcast satellite service from the 11 transponders that Tempo
Satellite Inc. -- a subsidiary of PrimeStar's parent, TCI Satellite Entertainment
Inc. (TSAT) -- controls at the 119 degrees west longitude orbital spectrum.

Last month, PrimeStar gave up its bid to merge with News
Corp.'s American Sky Broadcasting Inc., which would have allowed it to launch a more
robust service from 28 high-power transponders at 110 degrees.

That act followed the U.S. Department of Justice's
move to block the merger, citing anti-competitive concerns over PrimeStar's cable

Even at 119, PrimeStar faces a few regulatory challenges,
although PrimeStar officials were optimistic last week that the Federal Communications
Commission would approve a license transfer for the orbital spectrum from Tempo to

Because it has access to a limited number of transponders
at 119, PrimeStar's high-power service is not expected to compete head-to-head with
other multichannel-video services from DBS or cable, although PrimeStar CEO Carl Vogel
said the company does plan to offer it as a stand-alone service through retail.

In addition, PrimeStar will offer its high-power service as
a supplement to its own 160-channel medium-power service to help make it more competitive.
The high-power service is expected to add 80 to 85 channels.

PrimeStar also plans to distribute the new high-power
product as an adjunct digital-video service for cable operators, wireless cable companies,
SMATV (satellite-master-antenna-television) system operators and even telephone companies.

"Anyone who wants it can have it," Vogel said
during a media conference call last Thursday.

Although programming deals for the new service have not
been finalized, Vogel said the challenge is to come up with a balance of both known and
newer channels, so that the service will have appeal both as a stand-alone and an add-on.

Vogel expects the service to include 10 to 15 of the most
popular ad-supported cable channels, plus newer services such as high-definition
television and, possibly, data.

PrimeStar hopes to generate $30 to $35 in revenue per
subscriber, per month from the new service. Its medium-power service generated more than
$50 per subscriber, per month, on average this year. The company's core business
continues to gain new customers, but it has faced significant churn in recent months.

Vogel said PrimeStar must demonstrate that it has improved
its medium-power business before it can ask the high-yield market to finance its move to
high-power. The company has access to some capital through existing credit plans, and it
is exploring debt securities and vendor financing.

PrimeStar saw its churn peak in September, Vogel said.
Churn was down somewhat in October, and it dropped again for the early part of November,
Vogel said, to about 2.6 percent for the month.

PrimeStar president Dan O'Brien said recent anti-churn
programs are beginning to bear fruit. As the cost of entry for the medium-power service
continues to come down, PrimeStar is increasing its emphasis on the credit profiles that
it requires before signing new subscribers.

The company is also playing up its new
"ValueLease" program, which lowers monthly programming costs in exchange for an
additional $99 upfront.

"We believe that this will allow PrimeStar to
stabilize the customer base," O'Brien told reporters last week.

The greatest influence on customer churn, O'Brien
added, is customer service. Call handling should continue to improve, he said, as the
company completes the integration of its call centers following its roll-up from a
partnership this past spring.

Despite the verbal commitment from PrimeStar's board
and a favorable third-quarter financial report last week, Wall Street seems to be taking a
wait-and-see approach, with TSAT share prices remaining well below $2.

Some Wall Street investors questioned whether the support
from PrimeStar's cable owners was more psychological than financial, and they were
disappointed that PrimeStar did not announce the level of funding that the cable companies
were willing to provide.

In order to court Wall Street, PrimeStar must demonstrate
better operating efficiencies, analysts said. Vogel said PrimeStar would realize
"reasonably significant savings" next month, after it restructures its work

Much of the infrastructure for a high-power business is
already in place, since the company could duplicate some of the functions that it operates
for medium-power.

And Tempo already has a satellite launched at 119 degrees,
although the company has not officially accepted the bird from Loral Corp. Vogel said he
expects an announcement to be made within the next month. Even though the Loral satellite
is not working at full capacity, PrimeStar officials believe that it can still handle an
11-transponder service.

PrimeStar has had about 70,000 high-power DBS receivers on
hand from General Instrument Corp. since this past spring. Vogel said PrimeStar is working
with GI to create an add-on for those boxes that would allow subscribers to access the six
or seven HDTV channels that it plans to deliver. GI will also design a new
"DigiCipher" box for the high-power service.

Vogel said the volume of high-power boxes distributed for
the service will determine whether GI licenses any other manufacturers for the new

In the past, PrimeStar has admitted that a popular
consumer-electronics brand name, like Sony or Panasonic, could help it to penetrate the
retail channel more readily.

John Kaminski, associate buyer of satellite systems for
Sears, Roebuck & Co., said the company is "keeping our eye on PrimeStar,"
and it is always interested in the DBS category as a whole.

Sears already offers both EchoStar Communications
Corp.'s Dish Network hardware and systems compatible with DirecTv Inc. and U.S.
Satellite Broadcasting.

RadioShack is currently PrimeStar's only national
retailer, and it shows no signs of backing away from the company.

"We keep chugging right along," said Rick
Borinstein, RadioShack's senior vice president of merchandising. "The
medium-power offer is still what we sell, and when something else comes along, we'll
entertain that."