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EchoStar Takes Aim At Competition

By | March 17, 2003

      EchoStar Communications [DISH] Chairman and CEO Charlie Ergen has returned to his usual feisty form by directing verbal barbs at his competitors. He is also taking characteristically aggressive steps to tap the emerging market for Ka-band and high-definition television services.

      Ergen adopted a more statesman-like tone when he was attempting to gain regulatory approval to acquire Hughes Electronics [GMH] and its satellite TV unit, DirecTV. Now, the gloves are off and he is focusing on growing revenues, enticing new subscribers and reining in costs.

      Ergen shared his strategy with attendees at a Denver-based investment conference last week sponsored by Janco Partners.

      William Kidd, Lehman Brothers’ satellite analyst, related that Ergen accused DirecTV of overbidding by paying $2 billion for a multi-year pact to retain exclusive distribution rights for all the National Football League games on Sundays.

      Ergen pointedly joked about DirecTV by calling the recent deal to maintain its “Sunday Ticket” football package a different kind of NFL — “No Funds Left” – according to Kidd, who was in attendance.

      Bob Marsocci, senior director of public relations at DirecTV, defended his company’s decision to pay a hefty fee for exclusive rights to offer NFL games each Sunday to fans who are willing to pay a premium for the service. The exclusive rights last until 2006 with regard to cable rivals, while EchoStar is frozen out until at least 2008, Marsocci said.

      “NFL Sunday Ticket clearly differentiates us from all our competitors, both cable and satellite,” Marsocci said. “It is a football lover’s dream come true. Our NFL Sunday Ticket subscribers are among our most loyal and they spend the most money with us. We do expect to make money off of this deal.”

      Ergen also championed his company’s plans to launch a hybrid satellite, EchoStar IX, to offer Ku-band and Ka-band services. That satellite will be able to offer a combination of programming that includes standard digital signals, HDTV and local channels. If the capacity were used for only one service, it could provide 320 additional channels of digital programming, 60 HDTV channels or local channels in 60 additional markets.

      The EchoStar chief also demonstrated a prototype television designed to receive HDTV and digital TV signals. True to Ergen’s strategy to be the lowest-priced service, he said his goal would be to price those units that can receive both HDTV and digital TV signals below $1,000. HDTV sets now can cost more than twice that amount. EchoStar already designs set-top boxes that it manufactures through a third party. The HDTV sets could be provided the same way.

      A TV set that receives both HDTV and digital signals via satellite for under $1,000 would be an “exciting move,” said Chuck Hewitt, a Severna Park, Md.-based satellite broadcasting consultant who heads Charles C. Hewitt & Associates.

      “Nothing that [Ergen] does would surprise me, nor should it surprise anyone else,” said Hewitt, the former president of the Satellite Broadcasting and Communications Association. “He has always been the pacesetter when it comes to new technology.”

      Ergen is taking a cautious approach to the Ka-band by launching the hybrid EchoStar IX satellite. Had he succeeded in acquiring Hughes, he would have been into the Ka-band in a big way, overseeing Hughes Network Systems’ $1.8 billion SpaceWay Ka-band project. Roughly $1.4 billion of that total already has been spent on SpaceWay’s development.

      SpaceWay’s Ka-band satellites will have 10 times the overall capacity of Ku-band satellites, said Arunas Slekys, vice president of corporate marketing and general manager of the Russia/NIS business at HNS. SpaceWay’s objective is to provide business customers with networking capabilities that would offer unparalleled throughput, capacity or “intelligent” routing, he added (SN, Feb. 3, 2003, p. 1)

      Hewitt said he is “convinced” that satellite broadband can compete with cable and DSL alternatives. “So far, our trials of satellite broadband have been at the Ku-band level,” Hewitt said. The enhanced capabilities of Ka-band capabilities would offer satellites the opportunity to rival the terrestrial alternatives.

      The Ku-band satellite broadband options are higher priced than DSL and cable. However, cable has been raising its rates for broadband, Hewitt noted. Cable companies are beginning to charge more for broadband services if the customers do not also subscribe to their TV programming.

      During his remarks last week, Ergen took a direct jab at cable TV’s business model. Cable operators typically have no free cash flow, high fixed costs, poor balance sheets with high-debt and subscriber bases that are limited by old set-top boxes, he argued.

      EchoStar is generating positive free cash flow and can cover the contiguous 48 states to serve its roughly 8 million subscribers with a $400 million investment, Ergen said. This compares with Comcast Corp.’s [CMCSA] investment of a similar amount to serve only 1.4 million subscribers in a single metropolitan area. –Paul Dykewicz

      (William Kidd, Lehman Brothers, 212/526-4849; Chuck Hewitt, Charles C. Hewitt & Associates; 410/544-4108; Arunas Slekys, Hughes Network Systems, 301.428-5502)

      EchoStar IX At A Glance:

      Launch: The satellite is scheduled to lift off in May aboard a Sea Launch rocket from a floating platform in the Pacific Ocean;

      Ka-band Innovation: The satellite will offer one of the first commercial Ka-band spot-beam payloads for use over the United States;

      Broadband Testing: The Ka-band portion of the EchoStar IX satellite will be used to test, verify and deliver future broadband initiatives for the company;

      Ku-band Service: The satellite’s payload includes 32 Ku-band fixed satellite services transponders, at approximately 120 watts, to enhance EchoStar’s satellite TV service;

      Orbital Position: 121 degree West Longitude;

      Manufacturer: Space Systems/Loral of Palo Alto, Calif.;

      Skynet Partnership: An additional C-band payload on the EchoStar IX satellite will be owned and operated by Loral Skynet, a unit of Loral Space and Communications [NYSE: LOR], and called Telstar 13.

      Source: EchoStar Communications