EchoStar: Still Lots of Dark Spots

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silversurfer

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Ending the Viacom feud boosted the satellite-TV company's stock, but competition from DirecTV and cable could soon complicate matters


When EchoStar signed a new contract with Viacom on Mar. 11 to resume broadcasting the media conglomerate's shows, relieved investors drove up the satellite-TV company's stock by 3.6%, to $35.35. No wonder. By then, due to a breakdown in negotiations over a new deal, 17% of EchoStar's 9.4 million subscribers had been obliged to go without channels such as MTV for two days. Consumer complaints snowballed, and analysts were envisioning an exodus of customers.

With peace restored, investors became more forgiving -- so much so that they overlooked the not-so-minor fact that neither Viacom (VIA ), nor EchoStar (DISH ) would provide details of their new contract. Another similarly overlooked implication, gleaned from programming EchoStar has now agreed to carry: Viacom may have gotten much of what it asked for -- perhaps even 40% price increases for the content it will provide over the contract's duration. News of the truce put the Street in such a good humor, investors even shrugged off EchoStar's announcement of a two-week delay in reporting full-year 2003 results while it discusses with the Securities & Exchange Commission a possible restatement of earlier results.

Granted, those restatement discussions center on a somewhat routine accounting question of whether the $5.6 billion company -- the No. 2 satellite-TV player behind DirecTV -- overaccrued a total of $26 million in revenue in 2001 and 2002. A restatement could slightly decrease losses for both years, estimates S.G. Cowen analyst Thomas Watts.

TOO RICH TO DIGEST? Still, any celebration would seem a bit premature. For one thing, the 340,000 subscribers the company added in the fourth quarter represented a slightly lower tally than the figure expected by analysts such as Standard & Poor's Tuna Amobi. That shortfall could indicate that EchoStar's growth is losing momentum.

If that's so, 2004 would represent a marked contrast to the glory days of 2002, when EchoStar added more subscribers than the rest of the pay-TV industry combined. And that could cause second thoughts among investors who have viewed EchoStar as a fast-growth alternative to cable-TV stocks and to Hughes Electronics (HS ) and News Corp. (NWS ), the owners of rival DirecTV.

At least that's the view of Amobi and other analysts, who argue that EchoStar is probably too rich for investors to touch at prices in excess of $30 a share. In the interim, many analysts are instead recommending Hughes or big cable operators such as Comcast (CMCSA ) and Cox (COX ).

TUNER OUTAGE. DirecTV, whose subscriber rolls grew by 405,000 in the fourth quarter of 2003, to 12.2 million, might start to outpace EchoStar, in part because of its relationship to media giant News Corp., says Adi Kishore, an analyst with tech consultancy Yankee Group. That gives the satellite-TV provider access to such widely viewed fare as Fox's National Football League games.

DirecTV also hasn't experienced the same shortage of HDTV (high-definition TV) tuners that EchoStar recently has encountered, says Amobi. Since as much as half of new satellite subscribers have HDTV-capable sets, that's hampering EchoStar's growth, he says.

Moreover, DirecTV and EchoStar could both suffer, as cable becomes more competitive. For years, as cable companies bled market share, satellite players bragged of their ability to provide more channels and with better video quality. But in the past year, those cable defections have slowed to about 1% a year, according to Kishore.

BOX IN A BOX. That's because, over the past five years, cable outfits have invested some $84 billion to upgrade their networks to handle as many channels as satellite, says Kishore. The new networks are so good that cable can now offer services, such as video on demand, that satellite players can't provide. While it'll take months to work out the kinks in such services, they could ultimately prove a major advantage for cable players.

What's more, some cable companies are starting to give customers digital video recorders (DVRs) with their subscriptions, something EchoStar already does (see BW Online, 4/11/04, "TiVo's Growth Picture: Still a Little Fuzzy"). By the end of 2004, those devices will become commonplace for subscribers of Comcast and many other cable companies -- though, so far, EchoStar says, it has installed more than a million DVRs -- a larger number, it adds, than any other pay-TV provider.

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