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By | June 30, 2003

      By Tom Watts, SG Cowen Securities

      Ohio Governor Bob Taft signed into law a bill that will apply a 6 percent sales tax to direct broadcast satellite (DBS) services, but not to cable TV. Ohio joins North Carolina in becoming the only two states that apply a sales tax to satellite TV but not to cable TV. Because cable TV represents nearly 80 percent of multichannel revenues and satellite only about 20 percent, it is surprising that Ohio lawmakers would ignore the much larger revenue potential in their quest to balance the state budget.

      Applying sales tax to satellite TV services is not new. Twenty-one states apply sales taxes to both satellite and cable TV. We expect more taxes to follow in the states’ efforts to close budget gaps. In most cases, states apply the same sales tax rates for both satellite and cable. Tennessee and Florida have different rates for the two, but still apply sales tax to both. Ohio and North Carolina stand out in their unique discrimination against satellite TV.

      We don’t expect the Ohio tax to dent satellite’s popularity, however. As we’ve shown in our research, satellite TV usually charges 25 percent to 35 percent less than cable for the same product, even while providing much better customer service. The inequitable tax will narrow the gap slightly. But satellite TV will continue to deliver a more favorable value proposition.

      Shortly, we expect that value gap to widen further. Local telcos, led by SBC Communications [NYSE: SBC], are expected to launch new bundling initiatives with satellite TV operators. Telcos have already taken the lead in undercutting cable modem prices with discounted DSL service. The combination of low-cost DSL, plus lower-priced DBS, should make satellite only more attractive.

      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 tom.watts@sgcowen. com. 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.

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