BSkyB, EchoStar Continue Diversification Plans

The diversification of traditional direct-to-home (DTH) players is continuing as BSkyB unveiled details of a new digital terrestrial (DTT) service, and EchoStar announced it will acquire Sling Media as well as looking to spin off its technology and infrastructure assets into a separate company.

EchoStar

Along with the Sling Media acquisition, EchoStar, in essence, is looking to split itself into two separate companies, a pay-TV business and an infrastructure and technology business.

"In our view, the transaction does two things. Firstly, it allows Charlie Ergen (EchoStar’s CEO) to expand and invest in the wholesale satellite services business without negatively impacting the consumer DBS business,”Spencer Wang, a media equity analyst at Bear Stearns, said in a research note. “It also allows Ergen to keep a separate company that he could run and expand if he were to sell/merge the consumer business. Ergen has made it clear over the last year that he is interested in pursuing business opportunities in the wholesale satellite services business.”

Ben Swinburne, a media equity analyst at Morgan Stanley, said, "We believe there are several motives behind this announcement. First, the company likely believes, and we agree, that it can create shareholder value by splitting its consumer satellite TV business and its wholesale business into separate equities. … Second, strategically the company has been mentioned in several transactions in the recent past that included getting larger in the wholesale satellite capacity business and the set-top technology business. The proposed split would allow investors and management to focus on their individual strategic directions. Finally, this may also lead to various recap possibilities as each company may adopt different capital structures.”

The moves also would make EchoStar a players in the global set-top box market, Todd Mitchell, a media equity analyst at Kaufman Brothers said. “By combining the assets of ETV, Nagravision and Sling, EchoStar is essentially creating a company that is vertically integrated on the set-top box software stack similar to NDS and OpenTV/Kudelski. With the transition to digital television and the launch of pay-TV service in the developing world, this is an area which we believe has strong growth prospects on a global basis. We believe as a pure-play standalone entity, ETC would have a currency and create a vehicle for consolidating smaller private set-top box technology companies.”

There also was more talk last week of AT&T acquiring EchoStar. “It is probably not a matter of time so much as a matter of price,”says Mitchell. "The time is right for a merger to offset both sides’ competitive issues. Charlie’s transfer of part of his investment into a family trust and the spin out of non-core assets we feel are a signal he is probably ready to sell, but it remains to be seen if he and AT&T can agree on price. We believe Charlie will walk away from anything short of a huge premium.”

Wang said, "In our view, today’s announcement likely means that an AT&T-Dish deal is not imminent (the next three months). It would be strange, in our view, for the company to announce a spin-off, if it were on the verge of selling itself.”

BSkyB

BSkyB’s also is looking to diversify, though it is along the company’s traditional TV roots. The company’s Picnic DTT offering is intended to target the part of the TV market that has proved stubbornly resistant to satellite pay-TV services.  The service, if approved, will have premium sports and movies content, albeit on a limited scale. BSkyB is betting there is a strong demand from digital terrestrial households to upgrade to a pay-TV service on a modest scale.

BSkyB has yet to unveil the pricing of the service, given it needs regulatory approval, but it will be interesting to see this, as Freeview’s attraction has been very much about not being sucked into monthly charges for TV services. With digital TV penetration in the United Kingdom now at more than 80 percent, it could still prove a tough market for BSkyB to crack. 

Will Freeview type customers be interested in a minimal charge pay-TV service? “We would expect Picnic pricing to be set to minimize cannibalization,” Daniel Kerven, a media analyst at UBS, said in a research note. “Picnic is subject to regulatory clearance and a decision from Ofcom is not expected until 2000. Our recent pay TV survey suggested significant interest in a pay lite service even on a standalone basis. … We would see Picnic as a positive and significant development for BSkyB and consumers which is not in forecasts — it would leverage off Sky’s existing assets to extend its reach and grow the market.”