January 25, 1996

Cable Giant Drops Out of Satellite Auction


WASHINGTON -- Tele-Communications Inc. dropped out of the bidding on Wednesday in the federal government's auction of a coveted satellite television license, after MCI Communications Corp. offered $472 million.

MCI Communications, which has an alliance with News Corp., will return on Thursday along with the one remaining bidder, Echostar Communications Corp. of Englewood, Colo.

All three companies are seeking to challenge DirecTV, which started the first "direct broadcast" service and can transmit about 150 channels of programming to pizza-sized antennas.

DirecTV, which is owned by Hughes Electronics, a unit of General Motors Corp., has 1.2 million customers so far and formed a partnership with AT&T Corp. on Monday that should greatly increase its marketing power.

The bidding, which came in at about the midpoint of estimates by outside experts, was a big setback for Tele-Communications, which had originally planned to buy the license for only $40 million from a start-up company that got the license free in the early 1980s.

The Federal Communications Commission killed that plan last year after declaring that the start-up company had been sitting on the license too long. Tele-Communications now owns two nearly completed satellites for which it has spent upward of $500 million, but it has no place now to use them.

"They're too big to use for paperweights," said a disappointed David Beddows, vice president of Tele-Communications, who headed the company's bidding efforts on Wednesday. The company is still trying to challenge the FCC's earlier decision in federal court in Washington, and a hearing has been scheduled for March 18.

If the legal effort fails, Tele-Communications may still be able to lease or buy other satellite capacity. It also remains a partner in Primestar Partners, which offers a less sophisticated direct-broadcast service that can be received on satellite dishes about 3 feet in diameter.

Wednesday's auction could have a big impact on both the fast-growing satellite television market and the traditional cable-television industry.

Tele-Communications, while revealing little about its strategy, clearly wants to develop a space-based distribution system that would supplement its huge base of ground-based cable-television systems.

John Malone, chief executive of Tele-Communications, has spoken for years about developing a "head-end in the sky" -- that is, in cable jargon, the place from which programs are distributed. He appears to have visions of using direct-broadcast satellites as a means to reach homes directly and as a sort of wholesaler for other cable systems.

MCI and News Corp., which is owned by Rupert Murdoch, have been vague about their plans but have talked about using the satellites to transmit information services and computer data as well as traditional television programming.

AT&T, which stayed out of the auction, decided instead to pay $135 million for a 2.5 percent stake in DirecTV and market its service under AT&T's brand name and through its giant sales force.

The most intriguing bidder is Echostar, a little-known company that already owns two licenses for direct-broadcast satellite service and launched its first satellite on Dec. 28. Echostar's current licenses will allow it to beam about 150 channels of television once the company launches a second satellite late this year.

But the company wants to acquire the new license, which would allow it to broadcast more than 200 channels. If Echostar wins the bidding against MCI, the FCC has said the company will have to sell one of the licenses it already owns.

"We want to trade up," said Charles Ergen, chairman and chief executive of Echostar, who was at Wednesday's auction.

Echostar, which Ergen founded in 1980, currently offers satellite television services over relatively low-powered "C Band" satellites that require antennas that are 4 and 5 feet in diameter.

The company had revenues of about $180 million in 1995. After raising $335 million in a debt offering, it built and launched a high-powered satellite six weeks ago aboard a Chinese Long March rocket.

That satellite will allow it to transmit about 75 channels of television or other information service, and a second satellite schedule for launch in the last quarter of 1996 would double that capacity to 150.

Winning the auction, however, would give it a slightly more desirable orbital parking space and lift total capacity to about 200 channels.

Experts had predicted before Wednesday's auction that the high bid would be between $300 million and $700 million. Many of the nation's biggest communication companies -- including all seven regional Bell companies -- decided not to participate at all.

Unless Echostar decides not to challenge's MCI's current high bid, however, the license should sell for more than $500 million.

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