Primestar Drops Satellite Deal on Antitrust Fears

In a blow to Rupert Murdoch’s once-ambitious plans to enter the U.S. satellite television market, Primestar Inc. has abandoned its $1.1-billion acquisition of a valuable orbital slot from American Sky Broadcasting, a joint venture between Murdoch’s News Corp. and MCI Communications Corp.

Sources said News Corp. now is negotiating to sell the satellite slot to the dominant satellite service, DirecTV, which is owned by Hughes Electronics. DirecTV could not be reached for comment.

The Justice Department filed a lawsuit in May to block the Primestar deal because of concerns that it would fail to invigorate competition in the cable industry. The leading cable companies, including Time Warner, MediaOne, Comcast and Cox Communications, own Primestar, and had agreed to give Murdoch only a nonvoting 30% interest in the company as part of the deal.

Justice Department Assistant Atty. Gen. Joel I. Klein called Primestar’s move “a big win for consumers.”

“It will ultimately mean lower prices, more innovation, and better service and quality,” Klein said in a statement. “DBS [or direct-broadcast satellite] service is the first real competitor to local cable monopolies. As result of this action, the last remaining DBS slot will not fall into the hands of the dominant cable companies.”

Ken Carroll, chief financial officer of Primestar, the nation’s second-largest provider of direct-broadcast satellite, said, “Given the hard-line constraints the Justice Department put on us and the number of parties involved in the transaction, it was hard to bring all the parties to agreement.

In an interview with Bloomberg News, Carroll said the company plans to focus on existing service for its 2.2 million subscribers.

While Primestar’s cable owners had come close to selling their stake to Murdoch and another partner, United Video, sources say the deal collapsed because turmoil in the equity market complicated the financing.

Direct-broadcast satellite uses orbiting satellites to transmit video programming to receiving dishes mounted on a subscriber’s home or office.

While DirecTV and EchoStar Communications Corp. can sell smaller 18-inch dishes because they control the best orbital positions, Primestar’s subscriber growth has been stunted by its less desirable slot, which requires a 36-inch dish and delivers fewer channels.

Analysts say that without a better orbital slot, Primestar will find rough going against satellite competitors.

The major satellite player, DirecTV, was kept out of the original auction for the ASkyB orbital slot by regulators concerned with giving the company too much control of the market. Murdoch negotiated a deal with Primestar after News Corp. scuttled a merger agreement last year with EchoStar, which then filed a lawsuit for breach of contract.

Analysts say that even if Murdoch and MCI find a bidder for their satellite property, they could lose heavily on their investment.