EchoStar Communications Corporation

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EchoStar Communications Corporation

5701 South Santa Fe Drive
Littleton, Colorado 80120
U.S.A.
Telephone: (303) 723-1000
Fax: (303) 723-1399
Web site: http://www.echostar.com

Public Company
Incorporated: 1993
Employees: 6,000 +
Sales: $1.6 billion (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: DISH
NAIC: 513220 Satellite Television Distribution Systems

EchoStar Communications Corporation is perhaps best known for its direct broadcast satellite (DBS) system, DISH Network, which was launched in 1996 and quickly became the fastest growing satellite TV service in the United States. The company also operates three interrelated business units. Satellite Services oversees satellite uplink, transponder space-usage, and other services for television customers and other satellite users. EchoStar Technologies Corporation designs, manufactures, and distributes DBS reception equipment (set-top boxes and antennas). The third unit, EchoStar International Corporation, is headquartered in the Netherlands and provides a range of satellite-related services throughout Europe, Africa, the Middle East, Australia, and Asia.

1980s Origins

The company that became EchoStar was founded by Charles Ergen in 1980 as a small retail store that sold direct-to-home satellite television products and services. During the 1980s it was primarily a manufacturer and distributor of C-band hard-ware. C-band satellites were used primarily to broadcast shows to cable system operators, not to individuals, because reception equipment cost about $2,500 and included a ten-foot dish antenna. By the mid-1980s the company, known as Echosphere Corp., was a leading supplier of direct-to-home hardware and services worldwide.

Foreseeing changes in the satellite industry, Egren applied to the Federal Communications Commission (FCC) in 1987 for a direct broadcast satellite (DBS) license. In 1992 EchoStar won a license to broadcast from one of three slots within the broad-casting range of the entire continental United States. The slot, among eight set aside by the FCC, was located above the city of Los Angeles. EchoStar Satellite Corp. was established to build, launch, and operate the company’s satellites.

Launching the Programming Service: 1993-95

In December 1993 EchoStar Communications was incorporated in Nevada, with headquarters in Englewood, Colorado, as holding company for 13 direct and indirect subsidiaries. Echo-Star claimed to lead the U.S. market for home satellite reception products, with a 30 percent domestic market share. The company had an existing distribution network of 5,000 dealers. For 1993 revenues from subsidiaries were $220.9 million, 33.8 percent more than 1992, with net income of $20.4 million, nearly double 1992’s net income of $10.8 million.

In January 1994 EchoStar made arrangements with DirectSat Corporation, a subsidiary of SSE Telecom that had also won a license to put a satellite above Los Angeles, to pool their licenses and resources to offer 110 channels of television, 250 audio channels, and data feeds of financial and weather information.

In 1994 EchoStar offered $624 million in senior secured notes along with 3.7 million common stock purchase warrants. Proceeds to the company were about $335 million. These so-called “junk bonds” had an interest rate of nearly 13 percent, with payment deferred until 1999. The proceeds would be used primarily to construct, launch, insure, and operate two direct broadcast satellites to be built by Martin Marietta Corp. (later Lockheed Martin Corp.) for $159 million. The launches were planned to take place in China in 1995 and 1996, with insurance costing $206.3 million.

If successful, the two satellites would be worth $881 million once service was initiated. The two satellites would enable EchoStar to begin broadcasting more than 100 channels of television programming to 18-inch receiver dishes that cost an estimated $500 each. The company’s target audience would be the 11.5 million American households not wired for cable and 20.4 million households wired for cable but with limited channel capacity.

AT&T would operate EchoStar I and provide tracking, telemetry, control, and maintenance services for the satellite. AT&T would also provide consulting services to Martin Marietta, the satellite’s builder. It was unclear at first who would supply the receiving equipment for consumers. At this point, access to the 18-inch satellite receiver was controlled by DirecTV, a subsidiary of General Motors’ Hughes Electronics Corp.

In 1995 EchoStar was building a $50 million uplink facility in Cheyenne, Wyoming, that would be operational by August 1995, and EchoStar I was scheduled to launch October 1, 1995. The company was busy lining up programming. Its initial hard-ware would consist of an 18-inch dish, set-top box, and remote. It intended to compete directly with the Digital Satellite System offered by Thomson Consumer Electronics and DirecTV.

EchoStar issued a prospectus for a four-million share initial public offering (IPO) in July 1995. By August 1995 EchoStar had signed programming deals with Viacom to carry its basic and premium channels, including Showtime, The Movie Channel, MTV, VH1, and Nickelodeon. It also had signed deals with HBO, CNN, The Disney Channel, Turner Classic Movies, ESPN, C-SPAN, and The Learning Channel.

EchoStar’s initial satellite launch was delayed because of problems with its Chinese partner, China Great Wall Industry Corp., which had experienced two launch failures in 1995. Meanwhile, DBS competitors DirecTV, which was owned by General Motors’ Hughes Electronics Corp., and Primestar, which was owned by a consortium of cable operators that included TCI Inc. and Time Warner, were mounting extensive marketing campaigns to gain market share.

The company’s first satellite was launched from China on December 28, 1995. EchoStar also acquired more channels by purchasing the 22 channel assignments of Direct Broadcast Satellite Corporation (DBSC) for $8 million. EchoStar had acquired a 40 percent interest in DBSC in 1994 and in 1996 acquired the remaining 60 percent for an estimated $23 million.

EchoStar’s DBS service would be called the DISH TV Network, with DISH standing for Digital Sky Highway. The service was scheduled to launch in February 1996 with 100 channels. It would compete directly with DirecTV and less directly with Primestar, which required a larger dish and had fewer channels.

The Launch in 1996

At the beginning of 1996 the FCC auctioned two blocks of DBS channels, one of which went to MCI and the other to EchoStar. EchoStar’s slot was too far to the west to be able to service the east coast, while MCI purchased the last DBS slot with full coverage of the continental United States. MCI and News Corp. were planning a joint satellite venture to be called American Sky Broadcasting Co. (ASkyB).

When EchoStar began offering DBS service in spring 1996, there were three competitors already offering similar services: DirecTV, United States Satellite Broadcasting, and Primestar. EchoStar was the only DBS service to have the capacity for two national DBS systems. Its receivers would be made by the French manufacturer Groupe Sagem and American company, SCI Systems. Philips would market EchoStar DBS dishes under its Philips and Magnavox brands.

EchoStar previewed its DISH TV Network at a trade show in March 1996, and by May the service was rolled out to consumers, who could chose from five programming packages with monthly fees ranging from $19.99 to $59.99. At the same time the company launched a $40 million advertising campaign to promote the DISH Network. By June 1996 EchoStar claimed to have 50,000 subscribers. The company would continue to offer various price promotions to gain subscribers. EchoStar was adding about 1,500 subscribers per day and forecast up to 400,000 subscribers by the end of 1996. DISH Network reached 100,000 subscribers by August 1996. EchoStar was offering its satellite dish and programming for low prices, and the competitors were soon forced to lower their prices as well.

EchoStar II launched on September 10, 1996, from French Guiana, doubling EchoStar’s channel capacity from 80 to 160. The company added two new basic packages: America’s Top 40, which consisted of 40 basic networks for $19.95 a month, and America’s Top 50, which included a 30-channel audio feed plus ten more channels, for $24.99.

In November 1996 EchoStar introduced a new promotion with computer manufacturer Gateway Inc. Customers who purchased certain Gateway computers would receive a coupon for a free satellite receiver system with the purchase of one year of DISH Network programming. The company would continue to use free dish promotions as an integral part of its marketing programs to attract new subscribers to DISH Network TV.

The company added 65,000 subscribers in December 1996, its strongest month, giving the DISH Network 350,000 subscribers by year’s end. Meanwhile, DirecTV added 165,000 subscribers in December, giving it 2.3 million subscribers at year’s end.

Company Perspectives:

Positioned as a single, convenient source for equipment distribution, sales, installation, service and programming distribution, EchoStar Communications Corporation is widely recognized in the communications industry for its research and development activities. The company and its subsidiaries deliver direct broadcast satellite (DBS) television products and services to millions of customers nation-wide.

Subscriber Growth in 1997

Seeking to expand its services beyond DBS, the company began entering into agreements for more satellites, and fixed satellites. The fixed satellite business required a higher degree of capitalization than EchoStar could command, and the company was admittedly seeking financial partners, among them TCI Satellite Entertainment. By February 1997 the company had $800 million of debt on its balance sheet. Its stock hit a 52-week high of $37 in February 1996, but a year later was worth about 60 percent less. It reached a 52-week low of $15 on January 29, 1997.

By the end of February 1997 it appeared that EchoStar had found its financial partner in Rupert Murdoch and News Corporation Limited. Murdoch was in the process of building an uplink center in Arizona for his proposed joint venture with MCI Worldcom, American Sky Broadcasting (ASkyB). Murdoch’s News Corp. planned to buy a 40 percent stake in EchoStar for about $1 billion. The deal would give EchoStar seven satellites able to deliver 500 channels, including the capacity to carry local stations. As part of the deal, MCI would own ten percent of EchoStar. The remaining 50 percent of EchoStar would be retained by the company’s shareholders. Under the terms of the agreement, Ergen would continue as CEO of EchoStar, and Murdoch would become chairman. EchoStar quickly announced it would invest $500 million to build eight regional uplink centers with the capability of delivering local broadcast channels. Analysts agreed that DBS service, which included local stations, would be the first really serious threat to cable television.

The proposed merger with News Corp.’s satellite business was soon running into opposition. News Corp. had failed to obtain permission from broadcasters to retransmit their signals, and the FCC was being asked to deny the ASkyB-EchoStar merger. When Murdoch insisted on management control over the merged company, the deal came undone. With News Corp. and EchoStar disagreeing on several technical issues, EchoStar went to court to force News Corp. to make good on a $200 million interest-free loan that was part of the merger agreement. Murdoch countered by insisting that Ergen resign as CEO and give up management of the venture. On May 9, EchoStar sued News Corp. for breach of contract, claiming $5 billion in damages, with News Corp. filing a countersuit the next month. Meanwhile, News Corp. and Primestar reached an agreement in principle to merge their DBS operations, but that proposed merger was also subsequently called off by federal regulators.

EchoStar continued to seek financial partners and filed with the SEC for a $378 million debt offering, in part to raise an additional $305 million to cover the costs of four planned satellites. As it negotiated with Lockheed Martin to reschedule its payments, the company’s debt reached $1.2 billion.

The company began a new promotion on June 1, 1997, whereby consumers could purchase EchoStar hardware for $199 without buying an annual subscription, subscribing on a monthly basis instead. By mid-1997 EchoStar had 590,000 subscribers and was adding nearly 50,000 new subscribers a month. EchoStar III launched in October 1997 from Cape Canaveral, Florida, and would serve primarily the east coast of the United States. The company also purchased 32.2 acres and a 190,000-square-foot building in Littleton, Colorado, for its new campus-style corporate headquarters for $7.5 million.

A $99 installation promotion resulted in 105,000 new subscribers in September. By the end of October EchoStar had 895,000 subscribers and was warning that a shortage of receivers would temporarily limit the number of new subscribers. However, the company had met its financing needs by raising more than $650 million through debt and equity offerings since its proposed merger with News Corp. fell through. The company reached an agreement with Sears, Roebuck & Co. to offer its $199 package in 800 Sears outlets.

For 1997 net losses rose 210 percent to $321.3 million on revenues of $477.4 million, up 140 percent. The company ended the year about $1.4 billion in debt after raising $750 million in debt during the year. The company also ended the year with 1.2 million subscribers.

More Channel Capacity in 1998

In January 1998 EchoStar began beaming the local signals of the top four networks’ broadcast affiliates into their respective markets in New York, Chicago, Boston, Washington, Atlanta, and Dallas, with additional cities to follow. Ten more Western cities would be added after the launch of EchoStar IV in the spring, according to EchoStar’s plan to reach more than 40 percent of U.S. television households. EchoStar asked the Library of Congress to determine whether copyright law allowed the retransmission of local network signals into their market of origin by DBS satellites.

The company introduced a new Top 60 programming package in May for $28.99 per month to replace the Top 50 package, adding such channels as American Movie Classics, Bravo, and the SportsChannel, among others. New subscribers were offered a $60 credit if they submitted a copy of their latest cable bill.

Key Dates:

1987:: EchoStar founder Charles Ergen files for a direct broadcast satellite license with the FCC, and gets one five years later.
1995:: The company’s first satellite, EchoStar I, is launched from China.
1996:: The company’s DBS service, DISH TV Network, is launched.
1997:: DISH TV reaches one million subscribers.
1998:: EchoStar acquires the assets of American Sky Broadcasting.
1999:: Company introduces the first satellite TV receiver/Internet browser; Congress passes the Satellite Home Viewers Act, allowing DBS providers to broadcast local programming in local markets.

EchoStar IV launched May 8, 1998, from Kazakhstan. Following the launch, the company encountered problems deploying the solar panels on the satellite. It subsequently found that one primary and one back-up transponder on EchoStar IV failed. Additional capacity was gained through an alliance with Loral Skynet to deliver niche programming through one of Loral’s satellites. EchoStar was also preparing to deliver data to consumers. It was already supplying data to niche markets through AgCast, an agricultural report, and Signal, a stock report. It began competing more directly with DirecTV by offering a $100 bounty to any DirecTV subscribers who switched to EchoStar. DirecTV responded by doubling the bounty for DISH TV subscribers who switched to DirecTV.

EchoStar received permission from the FCC to broadcast local network signals to “unserved” homes in Denver, Phoenix, San Francisco, and Salt Lake City from its EchoStar IV satellite. Industry periodical Broadcasting & Cable noted that the political climate was good for moving “local-to-local” service ahead, because it was seen as providing competition to cable television and possibly reducing cable subscriber rates. By September it was clear that Congress was working to pass legislation that would permit satellite TV companies to deliver local broadcast signals.

In October EchoStar announced a three-month promotion to new subscribers, giving them a $249 rebate on the cost of receiving hardware in exchange for a one-year subscription to the DISH Network’s America’s Top 100 CD programming package. DirecTV and Primestar, which each had their own promotions going, declined to match the offer. At the beginning of the month DISH TV had about 1.6 million subscribers, compared to four million for DirecTV and 2.6 million for Primestar. EchoStar also announced that it planned to offer interactive television nationally in 1999—including e-mail and home banking—using software from OpenTV Inc. of Mountain View, California.

Seeking to clarify which households qualified to legally receive imported network signals via satellite, EchoStar brought lawsuits against the top four broadcast networks. The FCC was currently considering new rules for determining such eligibility. The four networks—ABC, CBS, NBC, and Fox—countered by filing suit against EchoStar, claiming the company sold network programming to ineligible customers.

In November 1998 DISH TV introduced BBC America as part of its America’s Top 100 CD package. It was the first satellite carriage of the channel, a joint venture between the BBC and the Discovery Networks. EchoStar was also negotiating with cable operators to provide them with a digital satellite supplement to their regular cable offerings. Targeted were small cable operators with largely rural systems.

In December 1998 News Corp. agreed to sell its satellite television assets to EchoStar, which would increase EchoStar’s channels from 200 to 500. Under terms of the agreement, EchoStar would pay $1.25 billion to buy the DBS assets of the MCI Worldcom-News Corp. venture, American Sky Broadcasting (ASkyB). The stock deal would give MCI and News Corp. a 37 percent interest in EchoStar and end the litigation over the failed merger attempt in 1997. EchoStar would receive AskyB’s uplink center in Gilbert, Arizona, as well as a license to operate at another orbital location, and two satellites then under construction. EchoStar also got a three-year retransmission deal to carry Fox Network’s local signals and agreed to carry the Fox News Channel. Following the merger, EchoStar would control more than half the satellite slots over the United States. With FCC approval of ASkyB’s license transfer to EchoStar, the deal closed in June 1999, with EchoStar issuing 8.6 million shares of Class A stock.

Competitor DirecTV responded by acquiring its longtime partner, U.S. Satellite Broadcasting Co., for $1.3 billion in December 1998. The acquisition gave DirecTV an improved programming package and 200,000 new subscribers. In January DirecTV announced it would acquire rival Primestar for $1.82 billion, leaving DirecTV and EchoStar as the number one and two DBS providers, subscribers. EchoStar saw an opportunity to pick up Primestar’s old subscribers and offered a $200 bounty to its dealers for every Primestar customer they could switch to DISH TV. Analysts estimated that as many as 1,000 Primestar customers per day were switching to DISH TV.

The Top Two Satellite TV Services in 1999

In an effort to provide interactive television services, Echo-Star announced a partnership with Microsoft’s WebTV to include the WebTV Network Plus Internet TV service in a new generation of EchoStar integrated receiver/decoders that would be available in spring 1999. The service would deliver Web page content to viewers and allow them to pause a program for up to 30 minutes before resuming it. In June EchoStar rolled out its DISHPlayer, a satellite receiver with an integrated WebTV service that allowed users to surf the Internet, send e-mail, and play video games. The DISHPlayer was priced at $199, plus a subscription fee for programming service and another extra fee for Internet access.

In March EchoStar surpassed the two million subscriber mark for DISH TV. With federal cable rate regulations expiring in March 1999, lawmakers were seeking to find ways to increase competition for cable, rather than extend the rate regulations. In May a House bill on satellite reform passed that would allow DBS companies to provide a programming package that included local programming. For the rest of the year the Satellite Home Viewer Act (SHVA) would be the subject of intense lobbying on the part of satellite providers, cable operators, television station owners, and cable and broadcast networks. Hurdles to offering local-into-local service included passage of appropriate legislation, FCC approval of orbital license transfers, and retransmission deals with every local broadcaster.

In June EchoStar was recognized by President Bill Clinton for providing satellite dishes and 40 hours of school safety programming to school districts across the country. The company’s stock reached a 52-week high of $142.63 and later rose to more than $176 before settling around $151.

By the end of August 1999 EchoStar had 2.84 million DISH TV subscribers. EchoStar V was launched on September 23, 1999, from Cape Canaveral. Following a stock split EchoStar’s stock was trading at a 52-week adjusted high of $88.25.

In November SHVA passed Congress and was signed into law by President Clinton. It gave DBS providers like EchoStar and DirecTV permission to offer local broadcast channels to their subscribers in those local markets. As a result, satellite TV subscriptions were expected to grow by 2.5 million subscribers in 2000. Local delivery in the top 30 markets was expected to begin as soon as possible. EchoStar was immediately able to provide full market coverage in 13 cities covering 31 million homes, with other cities to follow, while DirecTV offered local broadcast affiliate programming to nearly 12 million house-holds in New York and Los Angeles with other markets to follow. In December 1999 EchoStar had nearly 3.5 million subscribers, and by April 2000 that number had reached four million. For 1999, the company reported a record $1.6 billion in revenues.

Plans for 2000 included up to six new satellites, as well as plans to market set-top boxes capable of recording live television programs without the use of tape. Although EchoStar had yet to show a profit since becoming a DBS provider, the company was positioned to take advantage of the new regulatory climate of the 21st century. Following passage of SHVA in 1999, DBS companies would be able to compete more effectively with cable television operators. Industry consolidation left EchoStar the number two satellite television operator, behind industry leader DirecTV. Both would be competing for market share in the years to come.