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PrimeStar Loses Altitude After Loss of ASkyB

News analysis: As Murdoch deal collapses, the satellite TV service's survival is uncertain. Cable partners may let it crash.


Rupert Murdoch's inability to close the sale of his American Sky Broadcasting to the consortium of cable operators that controls PrimeStar Inc. leaves PrimeStar, a struggling satellite television service, few attractive options for survival.

Some on Wall Street say Primestar's recent decline in value could make it an attractive acquisition for either of the two remaining satellite rivals, DirecTV or Echostar Communications Corp. Yet many observers say PrimeStar's cable owners would rather dissolve the venture over time than hand over new subscribers to their most threatening competition. What's more, the partners are skeptical of the business' potential without ASkyB and therefore may be unwilling to sink more money into it.

Even if Englewood, Colo.-based PrimeStar bites the dust, its cable owners may have accomplished an important goal. Time Warner, Media One Group, Comcast Corp. and Cox Communications, which together control 60% of PrimeStar, have through a series of maneuvers stymied the use of the last powerful orbital slot since it was auctioned off to ASkyB nearly three years ago.

Analysts say it is unlikely that any new companies will enter the satellite television business at this late date, so that instead of the three competitors the U.S. government has envisioned to take on the cable industry, there probably will be only two. From consumers' point of view, that could keep cable prices from falling any time soon.

ASkyB, a joint venture of Murdoch's News Corp. and MCI Communications, now part of MCI WorldCom, owns a valuable orbital slot that would have enabled PrimeStar to compete head to head with DirecTV and Echostar. A poor orbital slot and weaker signal requires PrimeStar to sell a 36-inch dish to customers, who get fewer than half the channels offered by Echostar and DirecTV.

DirecTV, Echostar and ASkyB control the three most desirable orbital slots, whose signals can be received using a less obtrusive 18-inch dish.

In May, the Justice Department blocked a proposed $1.1-billion sale of ASkyB to PrimeStar because of doubts the cable owners would regulate themselves. Murdoch and another PrimeStar partner, United Video, had devised a plan to buy out the cable partners but shelved the option last week because turmoil in the financial markets made it more difficult to finance such a transaction.

Murdoch is now considering other options, including selling the orbital slots. Regulators fear the slot would give one of the two other companies with similar orbital positions an undue advantage over the other.

But DirecTV and Echostar are the most logical buyers now--and may be the government's best shot at ensuring strong competition against cable unless a company such as Microsoft or Intel steps in to use satellites to deliver Internet or other data services.

Merger Unlikely

Industry experts agree that is too late for a newcomer to compete by investing heavily in satellites. Sources say even Murdoch was unwilling to put his own equity at stake to buy out the PrimeStar partners.

DirecTV, the market leader with 4 million subscribers, has deeper pockets thanks to its parent company, Hughes Electronics Corp. It could use the additional capacity to offer more channels or beef up DirecPC, its Internet offering.

While Echostar has been rumored to be in talks with ASkyB, some sources wonder whether the debt-laden company could come up with the money. Others say a payment plan could be structured as part of a settlement of a lawsuit filed by Echostar against News Corp. last year, after Murdoch scuttled a merger agreement.

Without the ASkyB slot, PrimeStar will have difficulty competing. Yet it is almost inconceivable that PrimeStar would now play into competitors' hands by selling their 2 million subscribers to either DirecTV or Echostar.

Though PrimeStar is not publicly traded, its market price is tracked according to the value of publicly traded TCI Satellite Entertainment Inc., whose sole asset is a 30% stake in PrimeStar. By that measure, analysts say, PrimeStar's value has plunged, making its subscribers worth less than $1,000 each--far below the $1,500 assumed by the cable partners when they contributed customers to the venture.

Yet that price is still steep compared with the $300 and $425, respectively, that Echostar and DirecTV spend to sign up an average new subscriber, according to the Carmel Group, which tracks satellite television. And after spending a premium in a potential takeover, either buyer would still have to convert those customers to their higher-powered systems.

Furthermore, both companies are adding subscribers at a healthy clip of between 70,000 and 120,000 a month, making it unlikely that they would pay a premium, especially considering that PrimeStar loses about 35% of its customers every year.

The high cost of keeping subscribers is also why many believe PrimeStar's partners will stop marketing its service and get out of the business once its customer base withers away.

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