DirecTV Purchase of PrimeStar to Shrink Satellite TV Universe

With DirecTV’s pact Friday to buy PrimeStar, the satellite television industry is on the verge of shrinking to only two players from five just three months ago.

Federal regulators have largely driven the consolidation, aiming to strengthen the satellite industry as a challenger to the long-standing monopoly of cable operators. But some consumer advocates and analysts question whether consumers will benefit.

“This only promotes more competition if DirecTV has a plan to change its strategy from a high-end service, with lots of channels and digital programming that are expensive, to one that is as cheap as cable,” said Gene Kimmelman, co-director of the Washington office of Consumers Union, a consumer advocacy group.

DirecTV and its remaining satellite rival, EchoStar Communications, have both reduced their prices over the last two years. But DirecTV has been less aggressive than EchoStar, which recently began offering 40 channels for a monthly fee of $20 that is cheaper than cable. The average cable customer pays about $32 a month for a package of 50 channels.

Kimmelman says he would like DirecTV to cut the price of its equipment and installation and offer smaller and cheaper programming packages. He said he will press his point with regulators, who must approve three recent acquisitions by DirecTV and EchoStar.

In November, EchoStar acquired the satellite assets of ASkyB, a joint venture between News Corp. and MCI WorldCom, in a deal that gave the Colorado-based company a sizable lead over DirecTV in orbital capacity. DirecTV responded with the $1.3-billion purchase in December of United States Satellite Broadcasting, and Friday’s PrimeStar transaction.

Under the deal, DirecTV will pay PrimeStar $1.32 billion for its 2.3 million subscribers, and an additional $500 million for satellite assets owned by PrimeStar’s cable partners, Time Warner, MediaOne Group, Cox Communications, Comcast, General Electric and TCI Satellite Entertainment.

The two purchases make DirecTV the nation’s third-largest pay television company, with about 7 million subscribers, trailing Time Warner, which reaches nearly 13 million cable subscribers, and Tele-Communications, with nearly 11 million cable customers.

The acquisitions also significantly close the gap between EchoStar’s and DirecTV’s capacity. DirecTV, a subsidiary of Hughes Electronics, said the additional orbital capacity would add 90 channels, bringing its total service to 370 channels.

Eddy Hartenstein, president of DirecTV, envisions new high-definition television channels and interactive services. DirecTV and EchoStar have been signing deals with technology partners in a race to compete with services being developed by the cable industry.

Michael Smith, chairman and chief executive of Hughes, projected that the acquisitions would also strengthen the company financially. He said the subsidiary will account for about 70% of Hughes’ cash flow this year and the television service would bring in more than $300 million in operating profit next year, on revenue of $5 billion. He estimated that DirecTV would have about 9 million subscribers by 2000, which translates into nearly 10% of the nation’s households.

While Wall Street drove up the price of Hughes stock, some analysts cautioned that DirecTV faces significant challenges in converting the 2.3 million PrimeStar subscribers to its system. General Motors Class H shares, which represent the Hughes Electronics assets, rose $1.88 a share to close at $46.63 on the New York Stock Exchange, while TCI Satellite, whose only asset is a 30% interest in the privately held PrimeStar, fell $1.47 to close at $1.09 on Nasdaq.