Hughes Electronics [GMH] has avoided expenditures of up to $1 billion by terminating its broadband alliance with struggling America Online, a unit of AOL Time Warner [AOL].

Had Hughes maintained the alliance, it would have needed to spend that much on additional sales, marketing and development efforts to support joint products and services, company officials said.

However, cancellation of the agreement comes with a price tag. Hughes expects to take a $23 million pre-tax charge, although that amount is modest compared to the $1 billion in costs.

Dissolution of the agreement allows Hughes Network Systems (HNS) to get out of related contractual obligations with AOL, according to a document filed with the Securities and Exchange Commission. However, the Hughes business units may engage AOL in other business arrangements in the future.

HNS will continue to provide Internet services by satellite to AOL broadband subscribers who use bundled services until the companies develop a transition plan to separate the AOL/HNS offering, according to the SEC document.

The parties have also released each other from claims related to the alliance dissolution, the document disclosed. In addition, AOL sold Hughes stock in January that originally had been acquired as part of the strategic alliance between the companies.

The unraveling of the once-promising relationship shows the difficulty in turning broadband alliances into profitable ones.

One issue that may have hurt the Hughes/AOL partnership is that consumers received no apparent price reduction for the bundled service, said Chuck Hewitt, a satellite broadcasting consultant in Severna Park, Md.

“It has always been a question in some people’s minds if one bigger bill is better than two or three smaller bills,” said Hewitt, the former president of the Satellite Broadcasting and Communications Association. “The jury is still out about whether you should bundle bills. Any bundling must make good economic sense to the customer.”

He added that bundling of video, Internet and data services can still be a valuable tool to spur the rollout of broadband services.

“I think broadband is going to be a good business going forward for cable and satellites,” Hewitt said. “I just don’t think we have come up with the right technology and business formula for it to be able to work for satellites yet. I’m still very enthusiastic about the future of satellite broadband.”

Cable has spent tens of billions of dollars to upgrade from analog to digital services, Hewitt said. Those fiber optic cable lines carry high-speed broadband. When existing satellite broadcast services are upgraded, it does not bring broadband. It offers high definition television (HDTV), the delivery of more local signals into local markets and an increased number of programs, he added.

–Paul Dykewicz

(Chuck Hewitt, 410/544-4108; Bob Marsocci, Hughes, 310/762-4656)