Hughes Plans Home Satellite TV System

In one of the most ambitious efforts by an aerospace company to expand into non-military markets, Hughes Aircraft said Thursday that Paramount Pictures and the Disney Channel have agreed to provide programming for a new satellite-based television broadcasting system.

The deals with Paramount and Disney are the latest in a series of ventures between technology companies and the entertainment industry. Hughes is seeking to be a major player in a potentially huge market that has the entertainment, computer, telecommunications and cable companies positioning themselves for the high-tech TV household.

Hughes is investing $500 million to develop a 150-channel system to directly broadcast TV programs and movies on a pay-per-view basis, which would use small home satellite dishes and the firm’s powerful HS-601 satellite. The firm plans to launch the first satellite this year and begin service in March, 1994--offering 50 to 60 movie channels, 20 to 30 sporting events and 20 to 30 special interest shows at any time.

The programming for the system has been among the most critical issues facing Hughes in getting the venture off the ground. Hughes believes that it will attract 10 million U.S. subscribers by the turn of the century and will generate $1 billion in annual revenues.

Eddy Hartenstein, president of Hughes DirectTv operation, said the firm is talking to the major Hollywood studios and is negotiating deals with two of them. Hughes has deals signed with six other cable channels, but the firm was not ready to announce them, he said.

Hughes Communications has emerged as one of the most successful ventures launched by a defense firm. The company, which has 400 employees, generates about 20% of Hughes’ profits. The firm is building more than $1 billion worth of commercial spacecraft to support an expansion of its various businesses.

While other major defense contractors are focusing on their core weapons businesses, Hughes, a unit of General Motors, is seeking to expand its commercial operations to 50% of sales by the end of the decade.

As the largest producer of communications satellites, Hughes has had some unique advantages.

Hughes Communications has moved aggressively to become the dominant provider of certain types of business data networks, which link cash registers at Wal-Mart, Target and Holiday Inns with their respective corporate headquarters. It is also the nation’s largest carrier of TV signals on satellites, with news, entertainment and sports programming.

But perhaps nowhere are the firm’s ambitions higher than in the direct broadcast satellite (DBS) market, where it hopes to attract 1 million subscribers in the first year who are willing to pay $700 for a hubcap-size satellite dish and a decoder box.

“It is a very large business, bigger than anything we are doing or that Hughes Aircraft is doing,” said Stephen Petrucci, Hughes Communications president. “There is an awareness that we are coming. There are very few people who are skeptical anymore that we are going to do this.”

Petrucci said the company hopes to sign up 2 million subscribers in rural areas that are not wired for cable TV and another 8 million in areas that already have cable.

Although Hughes will encounter major competition from cable TV operators, it believes it can compete effectively by offering far more channels than a typical 35-channel cable system.

A major obstacle for Hughes and other firms planning DBS systems has been securing enough programming to fill myriad channels. Many cable TV networks have been reluctant to make their programming available to competing services out of fear of losing viewers.

But legislation passed last year by Congress as part of its effort to rein in spiraling cable TV rates included provisions that will require networks such as CNN and HBO to make themselves available to emerging competitors.

“The new cable law in essence mandates that programmers make their product available to all multichannel distributors,” said John F. Cooke, president of the Disney Channel. “This may be the first one announced, but it is far from the last.”

But if cable operators successfully use new, so-called video compression technology, they could offer 500 channels and two-way interactive systems that would allow viewers to shop, make travel reservations or bank from home.

Hartenstein downplayed that competitive threat, however, saying that not all households will be willing to pay for the digital system and many cable operators will not be willing to make the investment on their end.

As for programming, Hartenstein said, a lot of material is developed but not used. “There are people who would die for Latvian folk dancing.”

Viewers would typically be charged $4.95 to watch a movie. DirectTv will show movies at the same time they are available at video stores--six months after they are shown in theaters.

Hartenstein said Hughes will not pay advance fees to the Hollywood studios, but will split subscriber revenues.

Last year, Hughes signed a deal with Thomson Consumer Electronics to develop home reception equipment in exchange for the exclusive rights to sell it for one year. Presumably, the equipment cost would drop after other vendors offer the sets.

Hughes is also building a ground station in Castle Rock, Colo., to uplink programming to its satellites.