Ergen says: no merger, no satellite broadband: DirecTV racks up strong subscriber growth

Cable World, Jan 14, 2002 by Andrea Figler

Forget about satellite as a two-way broadband-service competitor to cable if government regulators reject the EchoStar Communications-DirecTV merger.

So says EchoStar CEO Charlie Ergen, in Las Vegas last week for both the Consumer Electronics Show and the SkyForum satellite TV conference, which focused on the main issue for the satellite television providers--the big merger.

"The fact of the matter is, without question ... you're not going to see satellite broadband without the merger," Ergen said. "You just can't economically justify the risk in doing that."

At SkyForum, DirecTV chairman and CEO Eddy Hartenstein also said that the best way for satellite to offer competition against cable was through the merger.

But not everyone at the conference was in favor of the merger. Executives from Pegasus Communications Corp., which distributes DirecTV programming in rural markets, and the National Rural Telecommunications Cooperative raised concerns.

In addition to the oft-cited objections about pricing and choice in rural markets, NRTC president and CEO Bob Phillips said he worried that due to the merger, too few hands will control what viewers get to see.

Phillips referred to Ergen's battle to try to drop the Walt Disney Co.'s ABC Family Channel on Jan.1 as an example. If the EchoStar merger is approved, the rural viewer will not be able to watch ABC Family, Phillips said.

"So now you got one person controlling the content choice to the home," he said. "And that's a bad thing."

In legal documents filed earlier this month, EchoStar executives claim that ABC Family's rates were too high and its ratings too low to continue its carriage deal with the network. EchoStar also viewed Disney's purchase of the family channel from Fox as a change of ownership that gave EchoStar the right to shut it down. But Disney and its subsidiary, Fox Cable Networks Group, won a temporary restraining order to stop EchoStar from turning the channel off.

A hearing on the order, which was scheduled for Jan. 10, was postponed until this week but could be delayed even further, EchoStar spokesman Marc Lumpkin said.

EchoStar alleges that Disney will lobby Washington to stop the merger if it doesn't get its way. At the conference, Ergen explained that Disney was the only major programmer that tied rate increases to merger support. Even Fox Cable Networks Group, a subsidiary of News Corp., reached a carriage agreement for the merged satellite company, he said at the conference. News Corp. lost the bid for DirecTV and has vowed to fight EchoStar's merger.

EchoStar also dropped Disney's ESPN Classic channel on Jan. 1, when its carriage deal expired. Ergen claims ESPN Classic wanted a 15% rate hike to renew the contract.

If EchoStar had kept the channel, Ergen said subscribers would have faced a rate hike of more than the $1 a month increase announced last week. This $1 rate hike, to start for both basic and premium packages in March, represents a 3% increase, he explained.

As for EchoStar's new investments, the company announced new interactive services, including movie reviews, horoscope, games and customers support. It also introduced new personal video recorders that record up to 80 hours of programming.

The success of these new investments will be threatened, however, if the regulators reject the merger, Ergen said.

Meanwhile, executives from DirecTV say they're not just sitting around waiting to merge with EchoStar.

DirecTV president Roxanne Austin says the company has been focused on the bottom line despite the merger review.

DirecTV last week reported adding 405,000 net new subscribers for the fourth quarter, a total that exceeded not only the company's expectations but also Wall Street's. It was the second consecutive quarter of subscriber growth for the satellite provider.

But costs come along with growth, said John Stone, a satellite analyst at Ladenburg Thalmann & Co. "The faster these companies grow, in the short term, cash flow is going to hurt," he said. The company's revenue per unit should have been slower in the fourth quarter because subscribers bought fewer pay-per-view movies and downgraded to cheaper programming packages, as a result of the economic recession, he said. DirecTV declined to answer any financial questions about the fourth-quarter results. A fourth-quarter results announcement is scheduled for Tuesday.