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Ussb's Satellite Dish May Be Losing Its Spice


Media: SATELLITE TV

USSB'S SATELLITE DISH MAY BE LOSING ITS SPICE

USSB is in a hot niche, but the shares are stone cold

Michael A. Binger, portfolio manager for the Lutheran Brotherhood Opportunity Growth Fund, jumped at the chance to make what seemed a heavenly investment last February. U.S. Satellite Broadcasting Co. was going public. By buying a big stake, Binger got the Lutherans in on one of the hottest consumer-electronics crazes ever: satellite TV.

USSB shares a satellite with Hughes Electronics Corp.'s DirecTV. While DirecTV offers basic service, USSB sells premium channels such as HBO and Showtime for an average of $25 a month to consumers who buy the DirecTV/USSB dishes. At nearly $1,000 apiece a year ago, the dishes, which deliver scores of crystal-clear channels, "were selling like hotcakes," says Binger, and he figured USSB's shares would soon take off.

LOSING FAITH. They did--for a while. But last fall, a slew of rebates funded by USSB and DirecTV failed to spark a runup in dish sales. Instead of an anticipated 3 million subscribers by yearend, USSB and DirecTV had only 2.3 million, despite the fact that dishes were selling for as little as $199. Although its customer growth has kept pace with other satellite outfits, USSB stock remains the hardest hit. Says UBS Securities analyst Rick Westerman: "People are starting to seriously question their growth projections."

Now, big investors are losing faith. The Lutherans got out in July. Janus Capital Corp., USSB's largest outside shareholder, recently closed out its position. USSB's stock has fallen from a high of $38 in July to about $10.

It's a humbling turn of events for a company founded by Stanley S. Hubbard, regarded as a founder of the U.S. satellite-TV industry. Hubbard, a Minnesota radio- and TV-station tycoon, applied for one of the first satellite licenses back in 1981. Hubbard "was the visionary long before Hughes or EchoStar," says EchoStar Communications Chairman Charles W. Ergen.

Hubbard still runs the broadcasting empire. His 35-year-old son, Stanley E. Hubbard, heads USSB, and the family owns 60% of the shares. The younger Hubbard insists that nothing is awry at USSB and that direct-broadcast satellite programming is still a compelling business, even if the industry fails to grow as quickly as expected. On a cash-flow basis, USSB expects to start breaking even in June, with just 1.6 million to 1.8 million subscribers. It will make a net profit with as few as 2.8 million subscribers. "There's no scenario you can paint where the business doesn't work," says Hubbard. "Even if growth stops, we'll get to profitability."

PRICE WARS. Despite the defection of some large shareholders, USSB still has some deep-pocketed backers. Financier George Soros, Microsoft co-founder Paul Allen, Dow Jones, and some Minnesota businessmen all invested before USSB went public--and are sitting tight.

What has spooked some investors is not the business concept but the competition--as cutthroat pricing boosts subscriber lists but slashes margins. A price war launched by EchoStar in August forced DirecTV and USSB to follow suit: Each company paid dish manufacturers $40 for every dish sold. And there's even stiffer competition on the horizon. PrimeStar Partners, a satellite service offered by a consortium of cable companies, promises to get aggressive this spring with more programming and smaller, more powerful dishes. News Corp. expects to launch its ASkyB satellite late this year. "Competition will become fierce," says Yankee Group analyst W. John Aronsohn.

If Hubbard sticks to his guns, USSB can probably survive as a niche provider of premium programming. But after losing $237 million in the past 2 1/2 years, USSB might be wise to sell out. The five transponders it owns on the satellite it shares with DirecTV are quite valuable. "It may just make more sense for them to sell to DirecTV," Aronsohn says. Such a combination would allow the services to be marketed more tightly, and customers could pay one bill, not two.

But Hubbard has no plans to get out of the industry his family pioneered. "The future may bring something different. But am I receptive to [selling out]?" asks Hubbard. "No." And with his family firmly in control, he's not likely to be forced to change his mind.By Peter Elstrom in St. Paul, Minn., with Eric Schine in Los AngelesReturn to top


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