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EchoStar-linked company seeking to widen spectrum
By Chris Walsh, Rocky Mountain News
January 24, 2004
A small Colorado company with strong ties to EchoStar Communications Corp. is leading an effort that could shake up the pay-television industry and spawn new competition for cable and satellite TV companies.
South.com LLC, based in the Denver area, is aggressively bidding on licenses to beam television channels and high-speed Internet service using a ground-based wireless network.
The Federal Communications Commission is auctioning the licenses in an attempt to offer a new, potentially cheaper, way of delivering programming and broadband Internet access to U.S. households.
Its intent: increase competition and offer consumers more choices.
But Douglas County-based EchoStar - the nation's second-largest provider of satellite TV - actually could benefit.
EchoStar owns 49.9 percent of South.com, which is controlled by Denver businesswoman Phanie Sundheim.
As of Friday, South.com had bid $397 million on 34 spectrum licenses, giving it access to some of the largest markets in the country, including Denver; Boston; Washington, D.C.; and Atlanta.
EchoStar declined to comment for this report, and South.com did not return phone calls.
But analysts say the move is a gamble by EchoStar Chief Executive Charlie Ergen to strengthen the company's services and snatch subscribers from competitors. Conspicuously absent from the bidding is DirecTV, the world's No. 1 satellite-TV provider.
"When somebody buys into a company like South.com at the level Charlie Ergen did, they hold a few cards which give them a particular advantage down the line," said Jimmy Schaeffler, president and chief executive officer of the Carmel Group, a California- based satellite- and cable-TV research firm.
"One could guess that this is part of EchoStar's future. If it goes real well, they may have the opportunity to move it in the direction they'd like to move it."
At the beginning
The idea of using satellite-TV spectrum for wireless services dates back at least to 1999, when a company called Northpoint attempted to persuade the FCC to grant it a license to use the spectrum for free.
The spectrum is the same one used by EchoStar and DirecTV, but the signals are transmitted through ground-based towers instead of satellites.
EchoStar and DirecTV argued that sharing the spectrum in this manner would disrupt service for millions of their subscribers.
Instead of giving away the spectrum, the FCC decided to sell it to companies through an auction, hoping to increase competition for cable and satellite TV companies.
Each license has 500 megahertz of bandwidth, making it much stronger than broadcast signals. The licenses essentially have the same capacity as satellite to carry advanced services and channels.
"There's a lot of bandwidth available, and it has the ability to deliver many services available, like 200 channels in digital quality," said Sharif Rabah, sales and marketing manger of MDS Operations Inc., a Stuart, Fla.-based company that is bidding for spectrum to offer high-speed Internet.
On Jan. 14, the FCC began auctioning 214 licenses that cover all U.S. television markets.
The FCC prevented cable companies from bidding on licenses that cover areas in which they have penetrated at least 20 percent of households in the region.
As of Friday afternoon, companies placed 191 bids totaling $136 million.
"It looks like most companies that are bidding are headed toward doing something similar to a cable-TV-like service," said Lauren Patrich, spokeswoman for the FCC's wireless bureau. "But they're not obligated to tell us what they plan to do with it."
Fourteen companies - mostly unknown startups or small firms - qualified to bid.
Aside from EchoStar, however, another big player is taking a behind-the-scenes role.
The top bidder so far is DTV Norwich LLC, which is 49 percent owned by the satellite arm of cable giant Cablevision Systems Corp.
The satellite arm runs a new service called VOOM, which provides high-definition channels nationwide. DTV has bid $87.5 million for 49 licenses, some of them in top areas like New York City, Los Angeles and Chicago.
Even though the satellite industry aggressively fought to block additional use of the spectrum, two satellite companies now find themselves in on the ground floor of the technology.
"Their thinking seems to be: If you can't beat them in your own back yard, invite them in the house," Schaeffler said.
EchoStar could benefit
Analysts differ in their opinions of whether or not the spectrum will give rise to an effective competitor to cable and satellite.
But several analysts said EchoStar could benefit if the technology proves successful.
"Charlie Ergen is a poker player, and with this he's making a calculated bet," said Bill Jacobs, an analyst with Harris Associates in Chicago. "If they (South.com and EchoStar) can figure out the technology, it could be a good bet."
South.com could use the licenses to provide broadband Internet, and in turn offer the service through EchoStar.
High-speed Internet is seen by some analysts as a major weakness for satellite TV providers. Cable companies have gained millions of broadband subscribers by bundling Internet service with video.
EchoStar and DirecTV offer satellite broadband through partner companies, but it can be more expensive and more complicated than with cable.
"That's the piece that EchoStar and DirecTV are missing: the ability to effectively deliver both video and data," said Bruce Leichtman of Leichtman Research Group, a New Hampshire-based research firm. "The opportunity (with South.com) is to say 'Now we have partners, see if it works.' "
Another possibility: EchoStar could offer high-definition TV using South.com, which would free up valuable bandwidth on their satellites.
"If you're Charlie Ergen and you look ahead five years and say 'How do I get HD to all of my subscribers without putting up a bunch of satellites?' this may or may not be a way to do that," Jacobs said.
EchoStar also may be able to offer its local channels through South.com, which would free up bandwidth.
"They could be pre-empting a competitor from getting the spectrum, or they could try to buy programming from South.com or repackage it," said Matthew Harrigan, an analyst with Greenwood Village-based Janco Partners Inc.
Still, Harrigan said he doesn't think EchoStar's backing of South.com will amount to anything earth-shattering.
"I absolutely do not think this is a big deal."
ISH - News) that operates the DISH Network satellite TV service. South.com has placed bids totaling more than $39 million for licenses in Boston, Dallas-Ft. Worth, Washington, Atlanta and Detroit.
