Wall Street Analysis

By Tom Watts, SG Cowen Securities

Investor focus for direct broadcast satellite (DBS) companies has temporarily shifted from the marketplace to the courtroom. EchoStar Communications [Nasdaq: DISH] scored a victory in its case with attorneys general from 13 states, but still faces a federal suit pitting it against broadcasters. Hughes Electronics’ [NYSE: GMH] DirecTV claimed a false victory in its court case with the National Rural Telecommunications Cooperative (NRTC) and Pegasus Communications [Nasdaq: PGTV], but the case is finally moving to resolution.

On the disputes with the states, the attorneys general claimed EchoStar used misleading marketing practices, including not adequately disclosing prices for local services and contract cancellation provisions. EchoStar appears to have gotten off easily with a $5 million fine. From that amount, $3 million will go to consumers and $2 million will compensate the states for their cost of the investigation. EchoStar also agreed to modify its practices.

EchoStar’s case against broadcasters, under federal court jurisdiction in Miami, presents thornier issues. CBS [NYSE: CBS], Fox [NYSE: FOX] and others claim that EchoStar offered network and local signals to unauthorized customers. Typically, EchoStar can offer either: 1) an out-of-market signal to a subscriber who is unable to receive the local affiliate, or 2) the signal of the local affiliate only within its local market. The problem is that decisions regarding whether a subscriber can receive the signal are supposed to be made based on databases that are often inaccurate or out-of-date. We suspect that EchoStar has sometimes given signals to customers that claim they cannot receive their local signal, but in fact are predicted by the databases to receive the signal. The court may require EchoStar to “clean up” its customer list. Our models predict about a $1 impact on the company’s stock from this case.

In the Hughes case, last week’s ruling did not address the core issues: 1) What rights does the NRTC have upon the conclusion of its contract with DirecTV, and 2) When does that contract conclude? We look for resolution in the coming June 3 trial.

Tom Watts is a managing director and satellite analyst at SG Cowen Securities. He can be reached by phone at 212/278-4260 or by e-mail at [email protected]. Readers should assume that SG Cowen Securities Corp. and/or its affiliates intend to offer services in investment banking to the above referenced companies within the next three months, and to seek compensation for such services.