ECHOSTAR SWINGS TO FIRST-QUARTER PROFIT

EchoStar added 350,000 net new subscribers to end quarter with 8.53 million as revenue per subscriber rose to $51.48 from $48.36 year-earlier. Churn dipped to 1.36% from 1.37%. Improved earnings came despite EchoStar’s incurring $20 million in additional costs in redemption of 9-1/4% senior notes in Feb. and rise in per-subscriber acquisition cost to $448 from $430 year- ago. Company ended quarter with $2.6 billion in cash, cash equivalents and marketable investment securities, portion of which may be tapped for possible acquisitions and rollout of broadband service, CEO Charles Ergen told analysts in conference call Tues. Subscription TV revenue rose to $1.29 billion from $1 billion year ago as direct-to-home (DTH) equipment sales declined to $40.7 million from $57 million due largely to drop in sales at Bell ExpressVu, which sources receivers from EchoStar.

Ergen also weighed in on News Corp.’s proposed acquisition of Hughes Electronics, contending that it represented “mixed bag” for company. “We will respond to those things that we think are detrimental to the industry and the customers,” Ergen said. Among issues likely to be raised in FCC review process will be News Corp.’s foreign ownership and its ability to control content through its Fox programming arm, he said. At same time, Ergen, saying he had had better relations with News Corp.’s Rupert Murdoch than with Hughes executives, said there was potential for acquisition to make satellite industry “stronger” by helping in fighting programming piracy. “News Corp.’s acquisition will clearly be negative for cable and it may or may not be for EchoStar,” Ergen said. EchoStar’s relations with News Corp. have been contentious in past and failed merger in late 1990s spawned breach-of-contract suit that was settled later.

Separately, EchoStar and TV networks filed motions and briefs Mon., following trial last month in 5-year-old suit in which networks are seeking court order to block transmission of distant network signals. Networks alleged transmissions violated Satellite Home Viewers Act and infringed on programming copyrights. EchoStar reached settlements with ABC-TV (April 2002) and NBC-TV (Nov. 2002), but 6 other plaintiffs remain, including CBS-TV and Fox. Networks are seeking so-called “death sentence” that would force EchoStar to halt transmission of distant network signals and local channels. If judge finds in favor of networks, 60% of EchoStar’s 8.5 million subscribers could be affected, Ergen said. Judge’s decision could be issued later this month, he said.

In other litigation, results of investigation by state attorneys general of 13 states into EchoStar’s business practices are expected to released in several months, Ergen said. Two state attorneys general, who were joined later by 11 others, began investigation in April 2002 into whether EchoStar had failed to comply with, among other things, state consumer protection laws governing call response times and policies and advertising and customer agreement disclosures

In effort to expand service, EchoStar paid SES Americom $50 million in March to partly fund construction of new satellite that would be launched to 105? W orbital slot in 2004. EchoStar also agreed to lease all capacity on existing bird at 105? W starting in late summer to expand number of markets in which it carries local programming to 106 from current 64. New, higher power satellite will enable EchoStar to reach 150 markets by next fall, company said. It’s required to make series of payments over 12 years, starting with $13 million this year, $11 million in 2004, $54 million annually 2005-2013; $45 million 2014, $2 million in following year. Agreement with SES will “open up capacity” for EchoStar to expand high-definition offerings and start broadband business, Ergen said. It has struggled to establish broadband service, having seen investments in Starband and WildBlue fail. Launch of EchoStar-9 satellite to 121? W also has been postponed to July-Aug., from this month, due to scheduling conflicts, Ergen said. EchoStar-9 satellite is expected to provide 100 channels of foreign language programming and additional service for Alaska and Hawaii.

EchoStar said it continued to experience “anomalies” in operation of its satellites. EchoStar-5 bird, which has lost solar array strings in each of last 3 years, lost another in Jan., giving it minimum 92 needed to assure full power for satellite’s expected 12-year life. EchoStar-8 lost 3rd thruster in March, but remains operational. Satellite, which had 12 thrusters, had 2 others fail in 2002.

In case involving failure of 38 transponders on EchoStar-4, arbitration hearing has begun in N.Y.C. as company its case to have insurance companies cover $219.3 million claim. It is to present evidence supporting its claim this month, after which hearing will adjourn and resume in fall, company said in SEC filing. EchoStar filed insurance claim in Sept. 1998 and carriers responded with $88 million settlement offer that company rejected. More than 20 insurance carriers are involved including Ace Bermuda Insurance and U.S. Aircraft Insurance Group.

In hardware, EchoStar is weighing introducing fee-based service for its PVR product, although no final decisions have been made, Ergen said. EchoStar, unlike TiVo, in past hasn’t charged for PVR service. “It’s not for everybody and by no means do I think it’s going to be a majority of our customers for the foreseeable future,” he said.

On broadband front, EchoStar board member Nolan Daines resigned to head company’s effort to launch satellite-based Internet access service. EchoStar is likely to seek to create standard for delivering satellite-based broadband service in effort to drive down costs that have been barrier to entry in past, Ergen said. “We know that it has to be an open standard because that is the only way you get the costs down,” he said. EchoStar has tested packaging video satellite with DSL offering from SBC Communications, but results have been “mixed,” Ergen said. Problems with DSL package have stemmed from “operational issues” including incompatibility of SBC and EchoStar data bases, he said.

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Pending acquisition deal for DirecTV by News Corp. is indication that media landscape needs to be changed, Mediacom CEO Rocco Commisso told American Cable Assn. Tues. “[Rupert Murdoch] is now going to own a satellite television [platform], he owns the satellite, owns the programming and he’s going to squeeze me if I don’t pay him what he wants me to pay,” Commisso said. In their application to the FCC, News Corp. and Hughes have said they won’t treat unaffiliated companies differently where programming is concerned. Acquisition proposal also raises concerns about “anticompetitive behavior on entities’ parts that frankly will be blessed by the government,” he said. Cable operators are regulated by laws that were implemented to protect other companies from “perceived cable monopoly” which doesn’t exist anymore, Commisso said. DBS often has lower programming costs, no franchise obligations or sales taxes, no local property taxes and no infrastructure costs, he said, indicating changes need to be made to offset disparities.