PrimeStar Inc. officially gave up its fight to gain access
to the last full-CONUS (continental United States) orbital satellite slot last week,
citing costly legal fees and ongoing uncertainties related to an antitrust trial that had
been scheduled to start in February.
PrimeStar abandoned its $1.1 billion deal to buy high-power
direct-broadcast satellite assets controlled by News Corp., after an effort by News Corp.
and United Video Satellite Group Inc. to buy out PrimeStar's cable-MSO owners cratered.
The MSOs, which own about 60 percent of PrimeStar's equity,
balked at taking less than the original offer of $6 per share, despite a recent decline in
PrimeStar's market value, sources close to the deal said. Time Warner Inc., which controls
about 30 percent of PrimeStar, was the biggest roadblock to retooling the deal, the
The U.S. Department of Justice which sued to block
the deal because of PrimeStar's cable ownership officially broke the news last
Wednesday, with a press release heralding the decision as pro-consumer.
News Corp. followed shortly with a two-sentence statement
of its own, confirming that the PrimeStar deal had been terminated, and that its American
Sky Broadcasting LLC unit "is pursuing other options for the sale of these
That news led to heated talk that DBS competitors DirecTv
Inc. and EchoStar Communications Corp. were in discussions not only with News Corp., for
the sale of its assets at 110 degrees west longitude, but also with PrimeStar to buy out
its subscriber base of more than 2 million customers. With the PrimeStar/News Corp. deal
dead, those deals need not be tied together.
DBS sources said News Corp. is likely to sell its rights to
28 transponders at 110 to EchoStar, and a deal could be announced in a matter of days.
News Corp. broke off a short-lived deal to merge its ASkyB
assets with EchoStar just two months after it was announced, in February 1997. EchoStar
chairman and CEO Charlie Ergen then filed a $5 billion breach-of-contract suit against
News Corp. chairman Rupert Murdoch. Many analysts believe that the threat of that lawsuit
will prompt Murdoch to sell ASkyB's assets to EchoStar.
Both companies declined to comment.
EchoStar has not hidden its desire for the high-power
spectrum. The company was instrumental in driving up the bidding price of the slots at 110
to nearly $700 million at auction nearly three years ago. In addition to its full-CONUS
spectrum at 119, EchoStar also controls less-valuable half-CONUS spectrum at 61.5 degrees
and 148 degrees. It uses that spectrum to offer limited local-to-local television
Additional transponder space at 110 would allow EchoStar to
expand its local-into-local service to more markets, which, some said, would make the
company a formidable competitor against cable.
Stanley Hubbard, president and CEO of U.S. Satellite
Broadcasting, said that even with the additional spectrum, EchoStar would not have enough
transponders to deliver every broadcast station nationwide. Hubbard added that he believes
that local-to-local is a dead issue now, due in part to legislative uncertainty.
Hubbard said that while USSB is always interested in any
and all opportunities, the company has held no talks with News Corp. regarding a potential
deal. USSB controls the remaining three transponders at 110 degrees.
Unlike its DBS brethren, USSB stayed out of all of the
debates surrounding a possible PrimeStar/ASkyB merger. Now that the deal has died, Hubbard
admitted, "This certainly has short-term advantages for us," but he added,
"We're not sitting here claiming victory."
Neither DirecTv nor EchoStar took the opportunity to gloat
over their rival's woes.
While he could not be reached for comment last week,
DirecTv president Eddy Hartenstein said two weeks ago that although he expected
PrimeStar's subscriber base to have some value, he did not know what it would be.
He pointed to its high churn and to the differences in
hardware between the PrimeStar and Digital Satellite System platforms.
Janco Partners issued a statement last Wednesday estimating
that PrimeStar subscribers were valued at roughly $675 apiece.
At press time, PrimeStar chairman and CEO Carl Vogel could
not be reached for comment on whether the company plans to sell off its subscriber base,
or at what price.
In a media call last Thursday morning, Vogel insisted that
PrimeStar "is far from dead," and that its owners plan to proceed with its
medium-power satellite service at 85 degrees, and to launch a new high-power service from
11 high-power transponders at 119 degrees.
Vogel said the company was no longer looking for a
strategic partner, adding, "It's incumbent on us to consider any reasonable offer
that would increase shareholder value."
Last Friday, shares of TCI Satellite Entertainment Inc.
(TSAT), the publicly traded holding company for PrimeStar, were trading at less than $1
down from around $8 when the DOJ filed suit against the PrimeStar/ASkyB merger in
Because of its 30 percent-plus churn rate and high
installation costs, TSAT has high cash requirements in order add subscribers. Vogel said
the company has access to enough cash to carry it into the first quarter of next year, and
it will try to raise more long-term capital after financial markets settle down.
But those cash pressures, and the inherent disadvantages to
the medium-power business with its bigger satellite dishes, led many analysts to conclude
that the MSOs will sell out.
"I think that it's a tough future," Janco analyst
Ted Henderson said. "I don't see anybody stepping up and wanting to fund it."
Some questioned whether PrimeStar's cable owners and their
competitors in the DBS field would be able to come to terms over a price.
Steve Blum, president of California-based Tellus Venture
Associates, said it becomes a game of financial chicken how low will PrimeStar's
owners be willing to go, and how much would DirecTv or EchoStar be willing to pay?
Blum said DirecTv and EchoStar would be unlikely to pay a
premium over their existing subscriber-acquisition costs especially when
considering the costs involved in converting them to the new hardware and PrimeStar
is not likely to accept an offer below those figures.
"A DBS subscriber certainly isn't worth what a cable
subscriber is," said Lou Kerner, vice president at Goldman Sachs & Co. Kerner
added that the asking price might determine whether DirecTv or EchoStar would rather buy
the subscribers outright or try to poach them from PrimeStar.
Over the summer months, EchoStar and DirecTv ran dealer
bounty programs, which paid additional commissions to retailers that stole customers away
from their DBS competition.
It's possible that EchoStar or DirecTv could appeal
directly to PrimeStar customers with promotional offers designed to see how many they
could bring over through their own marketing efforts, rather than putting money in the
hands of PrimeStar's owners.
Hubbard said that while such efforts were a possibility,
"Our easiest subscriber is still the one that we take straight from the cable
While analysts may debate the price that DirecTv and
EchoStar would be willing to pay, no one was denying that both companies would jump at the
chance to add more than 2 million subscribers at the stroke of a pen.
Earlier this year, DirecTv had been in talks to buy C-band
satellite subscribers from UVSG before the latter signed a deal with PrimeStar. The
PrimeStar deal had been contingent upon its closing the high-power deal with News Corp.
Bob Berzins, senior vice president of high-yield research
at Lehman Bros. Inc., said it would be worth it to DirecTv to pay a premium for
PrimeStar's customers just to add that many en masse.
Vogel told reporters last week that it would be
"unconscionable" for News Corp. to sell its assets at 110 to an existing DBS
provider. "I don't see how two [competitors] are better than three."
Mickey Alpert, president of Washington, D.C.-based Alpert
& Associates, said that if high-definition television and local-to-local broadcast
over satellite takes off, two competitors with expanded capacity may be better than three
with limited capacity.
"In the long term, consumers are better off, because
they can get a full complement of services," he said.
It's still not clear that the DOJ would allow EchoStar to
own spectrum at two full-CONUS orbital positions. But some analysts said the government
may look favorably on EchoStar, which positions itself as the David to the cable
industry's Goliath. MCN
Kent Gibbons contributed to this story.
Weekly digest of streaming and OTT industry news
Thank you for signing up to Multichannel News. You will receive a verification email shortly.
There was a problem. Please refresh the page and try again.