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Can Charlie Ergen Still Go It Alone?


Even in the mogul-eat-mogul world of media, it's hard to top Charles W. "Charlie" Ergen for pure tenacity. Starting in 1980 by selling an oversize backyard dish door to door across Colorado, the 51-year-old former professional blackjack player built EchoStar Communications Corp. (DISH) into a $6 billion-a-year satellite-TV powerhouse. His m.o.: slashing prices to undercut rival cable rates and giving away free dishes.

But today the cable guys are far more formidable, having consolidated from 62 to 25 companies over the past decade, and Ergen's biggest satellite foe, DirecTV (DTV), is now in the hands of Rupert Murdoch's deep-pocketed News Corp. (NWS).

That leaves EchoStar facing the fiercest competition in its 25-year history. Earnings are down, in part the result of CEO Ergen having to spend heavily to match splashy new ads and giveaways by DirecTV. Now several Wall Street analysts are wondering if Ergen has the muscle to go on, or whether he might consider partnering -- or even selling his company. "I would never want to underestimate Charlie Ergen, but the game has changed for him," says analyst Aryeh Bourkoff, who follows cable and satellite for UBS Securities (UBS). "I'm not sure he can continue to go it alone without finding a partner."

EchoStar's Dish Network is still adding subscribers at a brisk pace, stealing disgruntled cable customers with offers of cheaper programming, crisp digital pictures, and better service. But EchoStar, which has 10.1 million subscribers, vs. 13 million at DirecTV, spent an average of $590 to add each new subscriber in the first half of the year. That strategy depleted Dish profits in a big way, from $178 million in the first half of 2003 to $45 million for the same period this year. By contrast, DirecTV added an impressive 915,000 subscribers by spending an even pricier $645 for promotions that included splashy ads, discounted digital video recorders, and four months of free service.

Apparently Murdoch is just getting warmed up. In August, he spent $938 million to buy Pegasus Satellite Television's 1.1 million subscribers, giving it a giant foothold in the rural communities where EchoStar has outsold DirecTV in the past. In September, DirecTV said it would spend an estimated $1 billion to launch four satellites by 2007 that will give it the ability to provide high-definition signals for more than 1,500 locations covering most of the country. By then, DirecTV also intends to offer the kind of interactive services, including shopping by TV and video-on-demand, that helped Murdoch's 48%-owned British Sky Broadcasting Group PLC (BSY) become a runaway success.

NETWORK UPGRADES

Murdoch's News Corp., which withstood more than $2 billion in losses in the 1990s before BSkyB became the industry leader in Europe, is hardly Ergen's only problem. Cable operators, long vulnerable to satellite operators because of their overpriced packages and uneven service, are completing an $85 billion upgrade of their networks. That will allow them to retain more customers by offering phone, video-on-demand, and other services. And on Oct. 14 new rules by the Federal Communications Commission opened the door for phone companies to offer video to their customers. That prompted SBC Communications Inc. (SBC), an EchoStar marketing partner that has helped add more than 100,000 Dish subscribers this year, to say it would accelerate a $6 billion upgrade of its system to fiber-optic lines so that it, too, can sell TV services.

So what is the No. 2 satellite exec to do? Ergen just keeps on pushing. Along with SBC, he's planning a video-on-demand service and to offer more local signals, key to luring new subscribers. So far, Dish offers local news and programming in 151 markets, vs. around 116 for DirecTV. He has also overhauled his business plan, dropping Dish's requirement that new customers pay in advance for a year's programming if they choose to just lease their dish and set-top boxes and not purchase them. Now EchoStar can change how it accounts for the boxes, figures Morgan Stanley (MWD) analyst Benjamin Swinburne, who projects that the new lease plan will defer expenses and boost cash flow by 57% this year and 38% in 2005. The downside: With fewer long-range commitments, EchoStar will see more subscribers jump ship.

All these threats have dimmed EchoStar's luster on Wall Street. Despite a stock buyback program and the refinancing of more than $2.4 billion of its high-priced debt, EchoStar's stock, at about $33, is off by 4% this year, even as DirecTV's share price has climbed by 8%, to about $18. "Everything that Charlie has done so far is financial engineering," says Jea Shim, an analyst with Tradition Asiel Securities Inc. Shim worries that EchoStar, which has recently signed deals with other phone companies to sell its subscriptions, is leaving too much of its future in the hands of other companies. "It does raise the question of long-term strategy for EchoStar," Shim writes in a recent report.

Having scale would clearly help Ergen in a world of media giants, particularly when it comes to negotiating with programmers such as the Walt Disney Co.'s ESPN, whose fees account for more than 40% of EchoStar's overall operating costs. But Ergen, who declined comment for this article, isn't offering any hints about his intentions. Holding a 50.3% stake in EchoStar, Ergen could take the company private. Or he could seek a merger partner. SBC, which has invested $500 million in the company's bonds, has an option to convert those into a small equity stake. He could also merge with a major media player, giving him a ready supply of content for new services. Viacom (VIA), NBC (GE), Disney (DIS), and even satellite radio newcomers Sirius (SIRI) and XM Satellite Radio (XMSR) have been mentioned, although none has openly expressed interest. "Sometimes you have to tread water," Ergen told investors in August. "It's hard to know where you place your bet today as an investor because you have broadband, satellite companies, and cable companies kind of all vying for the same thing."

Or Ergen might simply choose to go it alone. But for how long? "There are still a lot of cable subscribers out there for him to steal away," says William E. Jacobs, an analyst with Harris Associates LP, which owns 2.9 million EchoStar shares. "But down the road in two years or so, he'll have some important decisions to make." For one of the most tenacious men in media, hanging tough has gotten a whole lot tougher.

By Ronald Grover in Los Angeles


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