In a deal widely endorsed by analysts, EchoStar
Communications Corp. and TV Guide Inc. announced an alliance last week designed to
transition TV Guide's roughly 1 million Superstar/Netlink Group LLC C-band satellite
customers to EchoStar's Dish Network direct-broadcast satellite service over time.
Under the terms of the exclusive marketing alliance,
EchoStar will pay Superstar/Netlink $10 million upfront for the TV Guide subsidiary's
promise to market Dish Network to the 1.4 million active C-band customers who now buy
programming from the company or who have in the past.
EchoStar will pay an additional per-subscriber fee as each
of the targeted C-band customers converts to Dish Network. TV Guide also receives ongoing
programming residuals for those subscribers who convert. Superstar/Netlink will continue
to own the customers who choose not to convert.
"We believe this is an absolute positive for both
companies," Janco Partners analyst Stacy Forbes wrote in a research report last week.
EchoStar gains access to early adopters of multichannel-video programming with a low
history of churn. And TV Guide will gain "conversion fees and residual payments from
subscribers who would likely have migrated to DBS eventually in any case."
The deal strikes another blow to the struggling C-band
business, which continues to lose subscribers by the tens of thousands each month,
currently serving fewer than 1.7 million households.
EchoStar senior vice president and general counsel David
Moskowitz boasted that last week's deal contrasted with DirecTV Inc.'s acquisition of the
former PrimeStar Inc. customer base in that most of EchoStar's costs will be incurred only
after a subscriber switches to Dish Network.
DirecTV paid more than $1 billion for the PrimeStar
customers. And while it owns the medium-power PrimeStar subscriber base and collects
ongoing programming revenues, there's no guarantee that those customers won't switch to
Dish Network before DirecTV has a chance to upgrade their equipment to high-power systems.
Sources with TV Guide confirmed last week that DirecTV had
also been in talks to buy TV Guide's C-band customers. DirecTV declined to comment on the
EchoStar deal last week.
Neither EchoStar nor TV Guide would give financial details
of the deal. But TV Guide president Pete Boylan said EchoStar would pay a
"multihundred-dollar multiple" upon each customer conversion and a long-term
residual stream based on how long a converted customer remains with Dish Network.
"Given how the [stock] market is valuing EchoStar, I'd
have to say it was worth the money" EchoStar is paying, Alpert & Associates
president Mickey Alpert said. "The market seems to validate paying money to buy
subscribers."
In related news, EchoStar signed a 10-year carriage deal
for TV Guide's new TV Games Network (TVG) horse-racing channel. Dish Network is scheduled
to launch the channel Nov. 15. It's the first national carriage deal for the network,
which plans to share wagering revenues with its affiliates.
DirecTV has not yet announced plans to carry TVG, and the
network's cable carriage has been limited to parts of Kentucky so far.
Boylan said TVG would give 15 percent of wagering revenues
from Dish Network subscribers back to EchoStar. Initially, the betting would be conducted
over the telephone only in the first eight states where such wagering is legal.
Boylan added that TVG is working with EchoStar to develop
software that would allow Dish Network receivers to offer interactive wagering directly
over the television.
Moskowitz said it's too soon to predict when or even if
EchoStar will add interactive wagering features to its set-top boxes.
EchoStar currently offers two additional racing services --
TrackPower and The Racing Network -- but only to customers who use dishes pointed at the
61.5 degrees west orbital spectrum. Those racing services charge an additional monthly fee
of $19.95 above any Dish Network packages.
TVG will be carried for no additional charge on the
40-channel Dish Network "basic" package, which sells for $19.99 per month.
Boylan admitted that TVG subscribers would be "clearly
more valuable" as Dish Network subscribers than if they remain on C-band, because the
large-dish platform is unlikely to ever support interactivity over the set-top receiver.
The two deals last week may indicate a closer relationship
over time. Boylan said TV Guide and EchoStar were in "substantive negotiations"
involving developing TV Guide-branded print publications or electronic programming guides
for Dish Network customers.
To encourage C-band customers to convert, Superstar/Netlink
plans to offer a combination of free Dish Network hardware, installation and programming.
Boylan declined to detail the company's conversion-marketing strategy last week for
competitive reasons.
But it's unclear how many C-band customers will be drawn in
by a free hardware offer, which is widely available today to any new Dish Network customer
who commits to a certain level of programming.
Evie Haskell, managing director of SkyTRENDS, which tracks
direct-to-home satellite-subscriber counts, said that although the C-band market continues
to decline, there are still some die-hard C-band fans who don't want to trade in their
systems for DBS.
"C-band is the real, true 500-channel product,"
Haskell said. In addition to sheer number of channels, C-band customers can also get
so-called wild feeds that networks don't necessarily want you to see, she added, such as
Dan Rather covering up his bald spot before he officially goes on-air.
EchoStar, which has its roots in the C-band industry, isn't
counting on adding the 1 million or more C-band customers overnight.
"We recognize that some of this will happen over an
extended period of time," Moskowitz said. He added that because C-band equipment is
very expensive to repair or replace, some C-band customers will wait until their C-band
equipment breaks down before converting to Dish Network.
