Telco team spirit

SBC investing $500 mil in EchoStar

NEW YORK — DBS provider EchoStar has raised the stakes in its battle with digital cable ops for video and broadband subscribers, inking a wide-ranging partnership with SBC Communications that will see the telco invest $500 million in Charlie Ergen’s satcaster in the form of a convertible note.

In addition to the half-billion-dollar financial contribution, EchoStar and SBC will form a strategic partnership to integrate billing, order entry and customer service that will enable the telco to sell a co-branded SBC Dish Network subscription television package as part of its bundle of local, long distance, DSL and wireless services.

The teaming of the No. 2 DBS provider in the U.S. with the No. 2 local telephone provider signals the most aggressive entry to date by a telco into the video landscape. It could also provoke cable operators to speed up their own telephone service rollouts next year.

Deal is mutually beneficial. EchoStar gets a big cash infusion with which to take more investment risks down the road. It also gains an exclusive telco provider and enhanced backend billing and customer service support. EchoStar is pedaling faster than ever these days to keep pace with enhanced digital offerings from cable as well as preparing for an aggressive marketing effort from DirecTV once Rupert Murdoch’s News Corp. takes the helm.

Broader appeal

SBC, which earlier this year toyed with a bid for Hughes’ DirecTV after EchoStar’s own merger efforts failed to pass regulatory muster, gains a foot in the door in a new business with far less risk. To help blunt the decline in its core residential phone biz, the telco will be able to offer the digital DBS service to its existing, 13-state customer base while widening its telco service offerings to EchoStar’s 8.5 million Dish Network nationwide subs.

SBC said it intends to integrate back-office operations such as customer service and billing, with EchoStar to facilitate the rollout of the bundled service in early 2004. Multiyear pact also will see SBC co-finance the development of other co-branded services.

Deal extends the two companies’ existing marketing partnership via plans to harmonize billing services and funding for future projects.

Satellite analyst Tom Watts of SG Cowen believes the deal gives EchoStar a leg up on cable by marrying the two cost leaders in video and broadband, respectively. EchoStar services typically cost 25%-30% less than cable for comparable video offerings, according to Watts’ research, while SBC charges only $29.95 for DSL compared with $40-$50 for cable modem services.

SBC’s markets count 56 million access lines and 2.47 million high-speed DSL subscribers.

The dual offering, which DirecTV has also been working to provide, broadly echoes cable’s own one-stop-shop approach to video and broadband, with the option of getting local and long distance phone bills integrated as well.

Other telcos, equally anxious for new revenue opportunities, are expected to mimic the SBC deal. Within hours of the SBC announcement, telco Qwest Communications announced a pair of nonexclusive marketing tie-ups with both EchoStar and DirecTV. Deal calls for the fourth largest U.S. telco to sell DirecTV services in Nebraska and Colorado, while pitching EchoStar’s Dish Network in Arizona and Seattle.

But SBC’s commitment goes beyond the usual resale agreements.

Not only will the two parties share revenues from their branded bundle and integrate billing, they may also share subscriber acquisition costs. That potentially gives EchoStar a promotional advantage over rival DirecTV.

Neither company would disclose revenue-sharing arrangements at this stage. Similarly, pricing is still under development, though SBC sources say the bundle will be “highly flexible.”

Answering cable

Speaking on a conference call Monday, EchoStar chief Ergen said his service hoped to maintain its goal of offering the lowest-priced digital video products across the board. “Cable’s improved their product in the last three years. … We cannot stand still,” he said.

Longer-term, companies said they will work together to develop technology that combines the functionality necessary to receive DBS, telephony, DSL and home-networking services harmoniously.

The newly issued 3% convertible subordinated note, due in 2010, may convert into some 6.87 million shares of class A EchoStar stock at $72.82 per share, equivalent to under 3% of shares outstanding. EchoStar shares closed Monday up 67¢ at $36 per share.

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