EchoStar Communications (DISH) - Get Report may not be the biggest player in the home-satellite business in the U.S., but it certainly knows how to throw its weight around.

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EchoStar, which operates the

Dish Network

home-satellite service, is running a distant second -- as judged by subscribers and revenues -- to

Hughes Electronics


and its


service. But thanks in part to improved results in the first quarter ended March 31, EchoStar is gaining momentum to derail a merger deal its rival contemplates -- or at least make Hughes' life more difficult.

The interplay between EchoStar, Hughes and

Rupert Murdoch


News Corp.

(NWS) - Get Report

-- which is hoping to acquire the DirecTV direct broadcast satellite service -- raises a crucial question commonly asked by investors in tech-related stocks: Is it a winner-take-all market, or can a second-place company survive in the shadow of the leader?

On Friday, EchoStar closed up $1.58 to $38.51. The company's shares are up $6.21, or 19%, since it reported first-quarter results before Thursday's market opening. Hughes, which trades as a tracking stock of

General Motors

(GM) - Get Report

, dropped 5 cents Friday to close at $22.88.

Looking Good

The numbers EchoStar reported Thursday were impressive, say analysts. The company added 460,000 net new subscribers to its Dish Network service in the first quarter, beating analysts' estimates --

Thomas Weisel Partners

analyst Ray Schleinkofer reported a consensus of 350,000 -- as well as the 455,000 additions in the first quarter of 2000, a headier economic time.

A surprise to analysts, too, was that EchoStar improved EBITDA figures for the quarter, going from negative EBITDA of $88 million in the first quarter of 2000 to positive EBITDA of $51 million in the first quarter of 2001. Judging from analysts' comments, achieving heavy subscriber growth and improved EBITDA in the same quarter is something akin to lowering taxes, raising military spending and balancing the budget simultaneously in the federal budget. (EBITDA, or earnings before interest, taxes, depreciation and amortization, is a measure of cash flow that Wall Street often tracks to gauge performance at money-losing companies.)

SG Cowen

analyst Robert Kaimowitz says the quarter's results validate EchoStar's approach of positioning itself as the cheaper, better alternative to cable TV subscribers, and focusing its marketing efforts on independent dealers in rural areas -- making for less-expensive marketing costs than Hughes, which dominates more urbanized areas, chiefly through consumer electronics dealers. "In the downturn of the economy,

EchoStar clearly

has the opportunity to flourish," he says. Kaimowitz has a strong buy on both EchoStar and Hughes; his firm hasn't done underwriting for either.

Says Tim O'Neil, wireless analyst at

Wit SoundView

, "EchoStar came off a very strong quarter, showing strong subscriber growth, showing strong ARPU

average revenue per subscriber gains. ... Their strategy of targeting rural markets has proven to be a competitive advantage." O'Neil has a strong buy on EchoStar and a hold on Hughes; his firm hasn't done underwriting for either.

Risk Factor

Sounds ducky for EchoStar, especially given that Hughes added only 350,000 subscribers in the quarter. (DirecTV now has 9.8 million subscriptions, against 5.72 million for EchoStar.) But an ugly possibility looms for EchoStar: that Murdoch, who has been itching to get into the U.S. satellite business for a decade or so, is pushing hard to acquire DirecTV, an on-again-off-again effort that appears to be on again following GM's announcement last week that it was in discussions with the Australian media baron over a combination of Hughes and News Corp.'s satellite subsidiary. Such a combo represents a long-term risk for EchoStar, wrote

UBS Warburg

analyst Thomas Eagan in a recent note. Eagan has a buy rating on EchoStar; his firm hasn't done underwriting for the company.

The balance of power may not shift that way, says Kaimowitz, who echoes EchoStar CEO Charlie Ergen's recent comments that the best way to build shareholder value for both EchoStar and Hughes is to merge them before News Corp. does any deal with Hughes. In fact, Kaimowitz in a recent report theorized that Ergen is readying a bid for Hughes. An EchoStar spokeswoman declines to comment on the status of any negotiations, as does a spokesman for Hughes.

But such a deal won't happen, says Bob Scherman, editor and publisher of the trade publication

Satellite Business News

and a longtime chronicler of the cable TV business. "There is no possibility of an EchoStar-DirecTV merger," says Scherman. "None." It would be much more difficult for Ergen to finance such a deal than it would be for Murdoch, Scherman says. There are control issues. And there's a regulatory problem, too: EchoStar, after all, is suing Hughes over antitrust issues. "Not even a


administration 50 times more conservative than this one" would approve such a deal, Scherman says. "All anyone would have to do is pull out his lawsuit and read it back to him."

The Spoiler

What Ergen is doing is trying to make life difficult for Murdoch, says Scherman. "It's nothing personal," he says. "This is a poker game for Charlie. ... Even if he fails, he wants to make sure that Rupert pays through the nose."

A Murdoch deal would indeed strengthen DirecTV's competitive position against EchoStar, says Scherman. And that's a good thing, he adds, because the months of dragged-out conversations between News Corp. and Hughes have hurt DirecTV's operations. "I talk to a hundred people there, and let me tell you the place is a morgue right now."

Responds a Hughes spokesman, "Hughes and its operating businesses have been very focused on the fundamentals of our business and managing our growth in an uncertain economy."

So what's the best way to play this? Kaimowitz says he's telling clients who want to bet on the sector for the long run to swap out of their holdings in Hughes; value-oriented clients he's telling to hold on to their GMH shares with an eye toward getting a transaction premium on a takeover, though, of course, what that premium will be remains a mystery.