EchoStar Deal Sends Cable Stocks Down

The stocks of cable companies declined Tuesday because of fears a new satellite television service planned by News Corp., MCI Communications Corp. and EchoStar Communications would draw customers away.

Yet some analysts and industry executives questioned the partners’ ability to deliver on promises of vastly reduced prices for consumers and inclusion of local broadcast signals that are not currently available on satellite services.

Cable leader Tele-Communications Inc., which has about 18 million subscribers, was hardest hit on Wall Street, with shares dropping $1 to close at $13. Other cable stocks, including U.S. West Media, Time Warner, Comcast Corp. and Cox Communications, also declined.

“It’s unwarranted hysteria,” said Julian Brodsky, vice chairman of Comcast. “What has everybody buzzing is their ability to provide local channels, but that is fraught with uncertainty.”

On Monday, News Corp. agreed to buy half of EchoStar, a fledgling satellite service provider, for $1 billion in cash and satellites. MCI, News Corp.’s satellite partner, would own 20% of News Corp.’s half interest, or 10% of EchoStar.

EchoStar’s stock regained some of the value lost since last February’s high of $38.75. With uncertainty over its financial wherewithal removed, EchoStar shares jumped $8.75, to $26.75, after a $3 increase Monday.

The new partners said they would cut upfront customer costs of roughly $700 in half, while eliminating a disadvantage that has kept satellite services from being widely adopted. By combining their capacity, the partners said that by 1998 they would be able to add broadcast signals from local affiliates of national networks such as Fox, NBC, ABC and CBS to their eventual lineup of an unprecedented 500 channels in most of the country.

But Brodsky and other potential rivals say the partners face significant technological, regulatory and financial issues. Some local broadcasters worry that Fox will favor signals of its own local stations by carrying some, but not all, local signals.

Others worry that satellite signals are not as easily directed as cable wires. “We know where our wires go, but who knows where satellite signals will go in hyphenated markets like Baltimore-Washington, Dallas-Fort Worth,” Brodsky said.

And DirecTV, the leading satellite television service, may contest the merger with government officials, according to industry sources. The Hughes Electronics subsidiary was prohibited from bidding on the last remaining digital broadcast satellite orbital slots in an auction last January because of government worries that it would become too powerful.

MCI won the license with a $683-million bid and those slots are now part of EchoStar’s massive orbital war chest. They give EchoStar 52% of the orbital slots able to reach across the country, far surpassing the 28% held by DirecTV.

“We weren’t even allowed to bid for that spectrum, which now accounts for almost half of their reach,” said Eddie Hartenstein, president of DirecTV, which has 2.4 million subscribers to EchoStar’s 450,000. He said the company would investigate whether they could contest MCI’s license.

Satellite rivals also wonder how News Corp. CEO Rupert Murdoch can make any money in satellite if he cuts prices in half, while already starting with higher costs. “They paid $680 million for their transponders; Hughes and USSB paid nothing,” said Stanley Hubbard, head of United States Satellite Broadcasting, which pioneered the business in partnership with Hughes. “Their costs are three times everyone else’s, and if they subsidize the dishes, bring in local phone companies as partners to market the service, what’s going to be left for their shareholders?”

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The Dish

EchoStar Communications Corp. shares rose 44% on Tuesday. Daily closes since Feb. 7:

Tuesday’s close: $26.75

Source: Bloomberg News