News Corp., EchoStar Negotiations Hit Snag

News Corp. may terminate negotiations to invest $1 billion in EchoStar Communications Corp. unless the satellite-television operator uses the News Corp. security-card system for unscrambling signals for customers, EchoStar said Monday.

EchoStar said News Corp. demanded on Friday that it abandon security-system provider Nagra and resolve other unspecified issues before proceeding with the transaction. The security systems ensure that the signals are received only by paying customers.

While both companies had expected to submit applications for regulatory approval of the deal by the end of the month, EchoStar said the snag in negotiations would delay the filings.

Analysts wondered whether News Corp. Chairman Rupert Murdoch was using the negotiating point as a delay tactic, as a way to prop up his technology group or to bust the deal entirely. Sources said Murdoch may be getting cold feet because of the regulatory hurdles of the proposed transaction, struck in February.

The partners propose launching--at a cost of more than $4 billion--a satellite service by next year that will offer customers the large range of channels, as well as the local broadcast signals that rivals like DirecTV don’t offer.

The cable industry sees the proposal as a dangerous threat to its business and is furiously lobbying against the proposed Sky satellite services. Sources said Murdoch was disheartened by hearings with lawmakers last week, realizing, as one put it, “the effort will take more political capital than he expected.”

News Corp. would not comment on its negotiations with EchoStar.

Some analysts said the companies were negotiating publicly. “These are two of the better negotiators around,” said Jim Schaeffler, of the Carmel Group, which tracks the satellite industry. “They’re both trying to get the better deal.”

Analysts say EchoStar may be wary of using the News Corp. system, which they say has experienced problems with piracy. The News Digital Systems unit provides security services to other News Corp. satellite services, including British Broadcasting Corp. and Star TV, as well as to DirecTV.

But they say EchoStar is strapped for cash, with little negotiating power. News Corp. has agreed to tide EchoStar over with a $200-million interest-free loan while the partners seek regulatory approval for the transaction.

Still, Murdoch could need EchoStar’s satellite capacity to execute his strategy of rebroadcasting local TV signals across the U.S.

The shares of EchoStar fell $2.375 to $14.375. News Corp. shares were unchanged at $18.375.

In contrast, the shares of TCI Satellite Entertainment Inc. rose $0.3125 to $6.875 amid speculation that the satellite-TV venture would benefit if News Corp. canceled its investment with EchoStar. PrimeStar Partners, the satellite venture backed by a group of cable companies including Tele-Communications Inc. and Time Warner Inc., is expected to be merged into TCI Satellite.

Murdoch apparently proposed an alliance between his ASkyB satellite venture and PrimeStar in a recent meeting with John Malone, the chairman of TCI, which recently spun off TCI Satellite. Time Warner Gerald Levin has vowed to block such a deal.

EchoStar General Counsel David Moskowitz said the company would “do everything we reasonably can to use News Corp. technology.” He added, “This transaction makes all the sense in the world for both companies.”

EchoStar said it requested additional information from News Corp. about the conditional access system provided by News Corp.’s unit to determine whether it will meet terms set in the agreement between the companies.

On Feb. 25, News Corp. said it will buy 50% of EchoStar for $1 billion in cash and satellite assets. News Corp. would then sell 20% of its stake to MCI Communications Corp., which is its partner in American Sky Broadcasting.

News Corp. and MCI would get the stake in EchoStar by transferring assets from American Sky to EchoStar. The combined service, to be called Sky, would invest as much as $2.5 billion in 18 months to launch new satellites and set up the service’s infrastructure.

Murdoch two weeks ago told the Senate Commerce Committee that Sky will carry all local TV stations, making it the first satellite operator to do so and putting it in direct competition with cable operators. Murdoch has been seeking a change in copyright law so Sky can deliver local signals.

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Bloomberg News contributed to this report.