Vivendi to Take Stake in EchoStar

Vivendi Universal agreed Friday to invest $1.5 billion in EchoStar Communications Corp. in a dramatic bid to launch new film channels and bring interactive television and subscription music services to the U.S.

Access to EchoStar’s 6.5 million satellite TV subscribers would help the French water and entertainment giant shore up a serious weakness in its U.S. distribution that has undermined its plan to become a major media player. Vivendi Chairman Jean-Marie Messier wants to compete head to head with AOL Time Warner Inc. by delivering entertainment to consumers over an array of home and mobile devices.

Messier also acknowledged Friday that Vivendi’s negotiations with Barry Diller’s USA Networks Inc. could result in a monumental deal as early as Monday. Vivendi would buy USA’s television assets, including cable channels USA and Sci-Fi, and install media mogul Diller as head of an expanded Universal Studios.

“Barry would be the key to the future,” Messier said Friday during a conference call with reporters to announce the deal with EchoStar, the nation’s second-biggest satellite-TV provider.

Messier said he was bringing Vivendi directors up to date on the negotiations with USA at a Friday board meeting.

For Vivendi, the two deals could launch the company squarely into the fastest-growing segment of the U.S. entertainment business: cable programming.

USA and Sci-Fi would become the foundation for a new family of channels that Vivendi could launch on EchoStar’s Dish Network beginning next fall.

As part of the eight-year deal, Vivendi would be able to launch five channels on the satellite network. Vivendi also plans to launch interactive services that would allow subscribers to play games and download music, educational programs and new films.

EchoStar would use the Vivendi cash to reduce the $5.5 billion in debt it’s taken on to purchase DirecTV parent Hughes Electronics Corp. Investors are concerned about the high-interest debt forEchoStar shouldered to buy its El Segundo-based satellite rival.

The $32-billion Echostar/DirecTV deal also faces stiff regulatory scrutiny because it would create a satellite monopoly with 16 million subscribers and the nation’s largest pay-television service, reaching nearly 17% of all American homes. By contrast, AT&T; Corp.’s cable business, the nation’s biggest, reaches 13% of all homes.

“This puts us on sound financial footing,” said EchoStar chief Charles Ergen, who stunned the media world by beating out Rupert Murdoch’s News Corp. for DirecTV.

Ergen put up $2.75 billion of his own money as collateral to buy out General Motors Corp.’s controlling stake in Hughes.

Ergen said the Vivendi deal could breathe new life into the interactive television business, which he said has been slow out of the gate in the U.S. because of a lack of compelling content.

Vivendi has plenty of experience already with interactive programming. Vivendi’s Canal Plus in France is the largest pay-TV service in Europe and has had great success with video games and betting channels. In addition, Vivendi is the world’s leader in recorded music, is the second-largest educational publisher and owns Universal Studios, which has been on a hot streak, with such hits as “The Mummy Returns” and “The Fast and the Furious.”

The new distribution agreement would help Messier squeeze out more value from Vivendi’s acquisitions last year of Universal Studios parent Seagram Co. and Canal Plus.

One intriguing aspect of the deal would give EchoStar early access to new film releases. Though movies generally appear on pay-per-view channels a few months after they show up in video stores, Vivendi has agreed to release some Universal Studio films just weeks after the titles are available at Blockbuster and other chains--earlier than any other studio.

This could give EchoStar an advantage over cable rivals that are rolling out video-on-demand services that enable subscribers to order movies and TV shows at the click of a remote.

Cable operators have been pressuring studios for earlier releases of movies, but Hollywood has been reluctant for fear of cannibalizing home video rentals and DVD sales, which are the biggest source of film revenue. The studios also are eager to build their own movie subscription services over the Internet to combat Web pirates who download new releases without paying for them.

Neither Vivendi nor EchoStar would elaborate on how many new films would be available to Dish customers.

Vivendi and EchoStar negotiated for three weeks to complete the deal before Ergen set out Friday on a whirlwind tour to sell investors on the DirecTV merger.

Vivendi would own an 11% stake in EchoStar, with Messier joining the EchoStar board. Vivendi’s stake would drop to 4% if the merger with DirecTV were approved by federal regulators and shareholders.

“Ergen is a scrappy entrepreneur and is looking to grab market share now before cable is ready with these services,” said Lee Masters, the founder of E! Entertainment Television, who currently is president of Liberty Digital Inc. “But I think we have to be cynical because of all the [interactive television] announcements that never yielded a thing.”

Microsoft Corp. has invested $6billion since 1997 in AT&T; and Comcast Corp. in an attempt to buy its way into cable set-top boxes for its interactive TV-enabling software. But neither cable company has deployed set-top boxes with Microsoft’s software.

In addition to securing outlets for new channels and interactive services under the deal, Vivendi would gets its first major U.S. foothold for its set-top box software, which is dominant in Europe. Canal Plus has been trying unsuccessfully to break into the clubby U.S. cable and satellite set-top market for several years.

Ergen said Friday that Canal Plus’ software would be used in all future advanced set-top boxes. He estimated that 50% of the 2 million new customers EchoStar attracts each year will sign up for advanced boxes. He said the number of Canal Plus set-top boxes could double in the event of a DirecTV merger.

EchoStar now uses software from OpenTV Corp. Microsoft and Liberate Technologies are the two other major suppliers of operating software for set-top boxes.

Analysts say the Vivendi-EchoStar deal also could provide an important new platform for Pressplay, the online music distribution service owned jointly by Universal Music Group and Sony Music. Expected to launch next week, Pressplay uses the Internet to deliver songs by artists on Universal, Sony, EMI and several independent labels for a monthly fee.

Anita Larsen, a spokeswoman for Vivendi Universal, said, “We’d anticipate that Pressplay would become part of the interactive programming” offered as part of the Vivendi-EchoStar deal.

Theoretically, the system could be configured to let Pressplay subscribers order music whenever they saw an artist they liked anywhere on the EchoStar service.

One hurdle for Pressplay is that the service works best through a high-speed Internet connection, not the dial-up modems found in most homes. A satellite can deliver popular music files at extremely high speeds--much faster than a high-speed phone or cable connection--but only from the Internet to the user.

Analyst P.J. McNealy of GartnerG2, a technology research and consulting company, noted that Microsoft, which had backed News Corp.’s unsuccessful bid for DirecTV, provides key software for Pressplay. So if EchoStar decides to offer Pressplay service, he said, “they [Microsoft] at least get their technology in the middle of this.”

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Times staff writer Jon Healey contributed to this report.