EchoStar Slings Itself - Leeds School of Business
EchoStar Slings Itself
Into Mobile Entertainment
By ANDY PASZTOR and REBECCA BUCKMAN
September 25, 2007 11:07 p.m.; Page B1
For the past few years, satellite-television provider Echostar Communications Corp. has fretted on the sidelines while deep-pocketed rivals explored cutting-edge ways to deliver movies, television programs and music videos to increasingly mobile and tech-savvy customers. Yesterday, Echostar Chairman Charles Ergen took a step toward catching up.
Echostar said it will pay $380 million to acquire Sling Media Inc., whose Slingbox device has been one of the buzziest media gadgets of the past few years. The Slingbox allows users to watch their favorite television programs on any Internet-connected computer or wireless device, whenever it is convenient.
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Echostar said it is also considering splitting itself into two companies: its satellite-TV business, known as Dish Network; and another that includes its technology assets and Sling. That move is designed in part to foster more aggressive technology development in the offshoot company that could also benefit the much larger Dish Network. But on the other hand, the new entity would end up competing against even larger powerhouses such as Microsoft Inc., Cisco Systems Inc. and Motorola Inc.
If successful, the move into mobile entertainment could evolve into a broader strategic shift for EchoStar. The company in recent years has been outflanked by cable companies offering package TV/Internet/phone deals and an increasing list of on-demand movies and TV shows.
Echostar's satellite rival, DirecTV Group Inc., has focused on high-definition programming and sports packages. Subscriber growth at Dish has largely kept up with DirecTV, but the satellite industry generally has been buffeted by tougher competition from cable providers. And that doesn't include longer-term concerns about telephone companies snaring customers by offering their own TV packages.
In expanding from its core business, EchoStar, the nation's second-largest satellite-television provider, also could ratchet up pressure on rival satellite and cable operators to develop similar inexpensive, portable devices, according to analysts and industry consultants. The Slingbox device, which so far has generated a relatively small but loyal following among high-tech aficionados, takes video signals from a home television set or digital set-top box and "slings" them onto the Web. The programs then can be stored or played back on laptops and hand-held gadgets in hotel rooms, cars and anywhere else consumers wish, including sports events or local shows that otherwise wouldn't be available.
By embracing Sling's technology, EchoStar eventually may be able to slash costs and reduce its current total dependence on satellite distribution.
In the long run, satellite-television broadcasters won't thrive and may not even survive unless "they can offer video [programming] that people want to see, exactly when they want to see it," according to Max Engel, a consultant at Frost & Sullivan. "So much of EchoStar's worth is currently tied up in its satellite assets," Mr. Engel said, that the company "has been constrained in pursuing" other content and delivery options.
For Mr. Ergen, EchoStar's founder and iconoclastic chief executive, the acquisition is a relatively low-risk, low-cost bid to jump into a promising new arena and set up a second company focused largely on technology development. Intended to capitalize on years of developing and manufacturing set-top boxes for the more than 13 million subscribers to EchoStar's Dish network, the new entity also would include wholesale satellite-leasing and international operations.
But, in some ways, the fledgling firm suddenly would find itself competing against technology giants such as Microsoft, which also has been eyeing a range of offerings aimed at spurring mobile video services, according to satellite industry consultants.
Since U.S. regulators rejected EchoStar's proposed takeover of DirecTV five years ago, Mr. Ergen has carefully avoided disclosing his strategic plans, while unsuccessfully pursuing some acquisitions and reassuring investors that management was aggressively mulling various growth options.
EchoStar's shares rose 6.82% to $44.14 yesterday, partly reflecting investor support for the initiative but also spurred by rekindled speculation that EchoStar's direct-to-home broadcasting operations may become a takeover target.
"Separation of our consumer-based and wholesale businesses could unlock additional value," Mr. Ergen said in a news release, allowing each segment to pursue different growth strategies and finance expansion plans. EchoStar officials declined to elaborate.
In 2004, the Englewood, Colo., company announced plans to market its own portable digital video recorder aimed at subscribers desiring to watch programming on the fly. But that project failed to take off as hoped, and EchoStar became a significant investor in Sling Media, based in Foster City, Calif.
William Kidd, an analyst at Wedbush Morgan Securities, said Sling's technology probably offers far greater potential "embedded in other devices than being sold as a standalone retail" product.
If the concept attracts large numbers of Dish viewers, it would validate the widespread appeal of so-called place-shifting technologies that so far have been restricted to niche customers looking for cutting-edge solutions. EchoStar's move, although it was described as belated by some analysts and consultants, nevertheless may send ripples throughout the pay-television world.
"There is a good chance that EchoStar's next-generation set-top boxes will be hybrids including" Sling's technology, said Shahid Khan, a consultant at Interactive Broadband Consulting Group. And large cable-television operators, which already have studied and tentatively considered offering similar mobile solutions, may feel compelled to follow suit if consumer demand climbs.
"Today, they don't have an urgency to do it," so "it's not a business yet," according to Mr. Khan. But Sling's pioneering efforts, he believes, could be just as powerful as EchoStar's early championing of digital video recorders, which forced rivals to change their marketing plans.
Speculation about a possible takeover of EchoStar focused immediately on AT&T Inc., which has been trying to break into the television business. AT&T has been rolling out its own Internet-based TV service called U-verse, but acquiring EchoStar would enable it to secure better content deals with programmers and also could serve as a back-up in case AT&T faces technical hiccups. AT&T also partners with EchoStar for a TV service it calls HomeZone, using a television set-top box that blends satellite TV with on-demand movies and other services off the Internet. AT&T declined to comment.
Regardless of EchoStar's fate, Sling's acquisition already is a big win for some venture-capital firms that invested in the company. One of Sling's largest shareholders, DCM, formerly known as DCM-Doll Capital Management, had invested about $10 million in the company since Sling's first fund-raising round in November 2004, said David Chao, a DCM founder and general partner. DCM, of Menlo Park, Calif., stands to make five to six times its money on its total investment, Mr. Chao says. Venture firm Mobius Venture Capital also was an investor.
Since 2004, Sling raised just over $57 million from the venture-capital firms and other investors, including Hearst Corp.; Allen & Co.; Goldman Sachs Group Inc.; Liberty Media Corp.; and EchoStar. The company was one of the most high-profile start-ups in Silicon Valley's digital-media sector trying to nurture new Internet-TV technologies.
-- Dionne Searcey contributed to this article.
Write to Andy Pasztor at andy.pasztor@ and Rebecca Buckman at rebecca.buckman@
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