EchoStar, Hughes See a Glimmer of Hope

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Explicitly confirming the reported opposition to the EchoStar/Hughes deal among antitrust regulators at the Justice Department, the companies told the FCC Monday that they were planning to discuss the possibility of "major revisions" to the proposed deal.

Those revisions, say EchoStar and Hughes, would go beyond consumer safeguards already proposed by the companies, such as a single, national pricing plan that in theory would hold down DBS prices in areas in which satellite service doesn't compete with cable TV.

It appears that the DOJ won't pass judgment on the merger until Oct. 28 at the earliest. That's the day, according to the companies' FCC letter, when EchoStar and Hughes are scheduled to meet with the assistant attorney general and his senior staff.

Following a two-day deposition of EchoStar CEO Charlie Ergen last week, the Justice Department has requested time for an additional deposition. That deposition, to which EchoStar has agreed, has yet to be scheduled. The two companies are also preparing their antitrust remedy proposals to submit before the Oct. 28 meeting "to address areas of concern expressed by DOJ," they say. Those areas of concern aren't specified in the FCC letter.

What a Racket

But back to the numbers. Shapiro, who initiated EchoStar with a strong buy and Hughes with a buy, says he doesn't believe the fight between cable and DBS is a zero-sum game. "Although the market often treats the investment cases of cable and DBS as mutually exclusive," he writes, "we do not believe they are."

That being said, he writes in his extensive report that DBS operators will continue to claim a majority of the annual net additional subscribers over the next few year. DBS subscribers in the U.S., he estimates, will grow from 19.5 million at the end of 2002 to 27.5 million at the end of 2007, in comparison with a cable industry growing from 70.4 million to 73.8 million over the same time period.

In addition, says Shapiro, EchoStar should turn free cash flow positive in 2003 and Hughes in 2004. His firm has received compensation from Hughes and EchoStar over the past 12 months.

Among the DBS negatives pointed out by Shapiro and Rohan is that the cost of adding net new subscribers -- that is, new subscribers minus older subscribers dropping the service -- has regularly risen. Industrywide, calculates Rohan, it's gone from the low $800s in the fourth quarter of 2000 to an estimated $1,200 per subscriber.

Shapiro says, however, that free cash flow should peak as subscriber growth for DBS slows down.