Satellite-TV Firm Offers Some of Its Assets To Cablevision, Creating a New Competitor By ANDY PASZTOR and JOHN R. WILKE Staff Reporters of THE WALL STREET JOURNAL
Satellite-television broadcaster Echo-Star Communications Corp., hoping to revive its $18 billion bid to take over rival Hughes Electronics Corp., has agreed to help turn a third company into a viable, long-term competitor by providing a large swath of spectrum, transferring proprietary technology and making other concessions.
The offerings by EchoStar are part of a tentative agreement it reached in recent days with the proposed new rival, Cablevision Systems Corp. The concessions go further than many industry officials had anticipated as EchoStar and Hughes try to persuade federal regulators that Cablevision can become a counterweight to a combination of EchoStar's Dish Network and Hughes's DirecTV, which together have more than 18 million subscribers.
It isn't clear whether the latest moves -- expected to be the focus of a long-awaited meeting in Washington Monday between top EchoStar and Justice Department antitrust officials -- will persuade federal regulators to look more favorably on the pending merger.
The outcome of this corporate high-wire act could affect consumers across the country and, if it flies, reshape video and Internet access. Cablevision, which has long pined to get into the satellite-broadcast arena, sees a golden opportunity to use EchoStar's regulatory travails to jumpstart its own plans. Hughes, Cablevision and the Justice Department didn't have any comment. An EchoStar spokesman said "we have been working very hard with regulatory officials" to propose "structural remedies," but he declined to comment "on the specifics of any remedies." The department in the past has stressed the importance of letting private investors and market forces determine the fate of businesses divested as part of any antitrust settlements, and the proposals appear crafted to address precisely those concerns.
Ironed out in private meetings between EchoStar's maverick chief executive, Charlie Ergen, and Charles Dolan, founder and chairman of Cablevision, the package calls for transferring more than 40 frequencies to the proposed new entity to be called the Rainbow Direct Broadcast service. The deal also includes the sale of one of EchoStar's existing satellites and leasing capacity on two others, according to Cablevision documents and people familiar with the matter. In addition, EchoStar is ready to assist its would-be rival in securing television set-top boxes and other signal-receiving equipment, lining up retail distribution channels and even sharing the expense of providing subscribers with local television channels.
To ease the significant financial and other hurdles facing Cablevision, the Bethpage, N.Y., cable operator, EchoStar essentially is allowing the cable company to piggyback on its assets and technology, all part of a cooperative effort one Cablevision document describes as the way "to bridge the gap between initial startup" in late 2003 and the anticipated launch of the company's own fleet of satellites down the road.
But by its own estimates, the new company still needs to raise more than $2 billion at a time when investors have soured on satellite stocks. It also must find some way to quickly attract millions of customers from a standing start, before it legitimately could be considered a stand-alone competitor. Cablevision is expected to sell some of its cable-network assets, possibly including the Bravo channel, in order to pursue the Rainbow project, according to people familiar with the plans. The company also has told the government it plans to invest $300 million in the project by year end and that it intends to proceed with a scaled-down version serving the East Coast even if it fails to get additional frequencies from EchoStar.
Congressional leaders were briefed on the proposals, and Ken Johnson, a spokesman for Rep. W.J. "Billy" Tauzin, the Louisiana Republican who heads the House Energy and Commerce Committee, said the latest offer "at the very least deserves a thorough review" by regulators. If the new system offers local channels in every market as advertised, Mr. Johnson said, "it changes the equation."
Despite the flurry of activity, EchoStar's revised merger bid still faces long odds. Before the concessions were proposed, the Federal Communications Commission rejected, in unusually forceful terms, the proposed EchoStar-Hughes combination on the grounds that it would create a virtual monopoly in satellite-TV posing the risk of "immediate and substantial" harm to consumers. The commission said, "it is highly unlikely" that a Cablevision alternative could roll out new service and acquire enough customers to have "a significant competitive impact" within two years. Even after handing over 40 frequencies to Cablevision, EchoStar and Hughes would have close to 100 frequencies.
But a team of EchoStar lawyers has continued talks with the Justice Department, and Charles James, the department's antitrust chief, hasn't yet indicated whether he will oppose the merger or demand big divestitures. Now Mr. Ergen, who claims that a combined EchoStar-Hughes is the only way to drive down steadily climbing cable-TV rates, is hoping to gain traction at the Justice Department with the proposed divestitures and clear the way for the FCC to reconsider its objections. Mr. Ergen, who runs the Dish network, and Eddy Hartenstein, head of Hughes' larger DirecTV unit, are scheduled to attend Monday's meeting with Mr. James. EchoStar is based in Littleton, Colo. and Hughes, a unit of General Motors Corp. is based in El Segundo, Calif.
For their part, Cablevision and its supporters are scrambling to line up additional funding. With its single committed satellite still under construction, the company and its allies have set up a new entity, called Skyway Capital Partners and headed by former Walt Disney Co. executive Scott Feuer, to convince regulators and investors that they have the necessary money and management depth. One partnership document seeking investors, dated Oct. 24, argues that the anticipated system will be technologically superior to that of the combined EchoStar-Hughes, partly because it will feature greater viewer interactivity and more high-definition programming. Federal regulators have been prodding the industry in this direction for years.
By the end of 2003, according to the partnership document, the service will offer some 370 channels and "state-of-the-art" alternatives in satellite and home equipment. The new system, for example, will use home dishes that are 13 inches in diameter, versus the 18-inch wide models now commonly in use.
-- Peter Grant contributed to this article.
Write to Andy Pasztor at firstname.lastname@example.org and John R. Wilke at email@example.com