AT&T adds TV shows to offerings Small stake acquired in DirectTV service for $137.5 million

Nearly 200 channels

Investment decision is pre-emptive action against MCI's plans

January 23, 1996|By Michael Dresser | Michael Dresser,SUN STAFF

In a move that represents a formidable challenge to the cable television industry, AT&T Corp. announced a "broad and exclusive" agreement yesterday to market, distribute and invest in a fast-growing satellite-based competitor to earthbound TV systems.

AT&T said it is acquiring a 2.5 percent stake in the DirecTV high-power direct broadcast satellite (DBS) service from Hughes Electronics Corp. for $137.5 million, with an option to increase its stake to 30 percent over five years.

AT&T will begin offering the service this summer.

The deal will marshal the marketing clout of the nation's largest long distance company behind a service that has has attracted about 1.25 million customers in slightly more than 18 months of operation.

By enlisting the aid of AT&T, with its 90 million customers and potent brand name, DirecTV immediately gains a level of market credibility that millions of dollars of advertising could not buy.

"It validates everything the digital satellite system has done," said Jimmy Schaeffler, a satellite TV analyst with The Carmel Group in Carmel, Calif. "It takes them from a Triple-A league player to the Major Leagues."

DirecTV, based in El Segundo, Calif., is an all-digital television service with the capacity to offer almost 200 channels of programming, including all the major cable channels, about 60 channels of pay-per-view movies and 29 audio channels.

The system requires customers to purchase Hughes' DSS system, which employs an 18-inch satellite dish, which can be installed in many places where larger dishes are prohibited. DSS dishes can also be used to tune in premium cable channels supplied by Hubbard Broadcasting's USSB, which will not be represented by AT&T.

For AT&T, the deal is also a pre-emptive strike against archrival MCI Communications Corp., which plans to bid this week in a Federal Communications Commission auction of the last two slots on the broadcast spectrum available for direct satellite service.

AT&T had been expected to compete in that auction, but dropped out last week for reasons that became clear with yesterday's announcement.

Joseph P. Nacchio, executive vice president of AT&T's consumer-small business division, said AT&T will reap important benefits from allying itself with "an up-and-running, established company."

Contrasting his company's strategy with MCI's, Mr. Nacchio said that if AT&T succeeded with a bid at the FCC auction, "you'd probably lose two years at a minimum while you get this up and running." Furthermore, he said, MCI will probably have to spend more than $1 billion to get a satellite aloft, while AT&T will get a foothold in the business at a bargain price.

MCI officials could not be reached yesterday for comment.

Mr. Nacchio made it clear that AT&T plans to pull out all the stops in marketing DirecTV.

He said long distance customers will find promotions for DirecTV in their AT&T bills, which will soon be separated from those of the local phone companies.

DirecTV will also be promoted by AT&T's army of telemarketers, and buyers of DSS satellite dishes will be able to charge their purchases to their AT&T Universal credit cards at preferential rates.

AT&T executives said they view DBS as one of a group of "bundled" telecommunications services that customers could put on one bill, including long distance telephone and Internet services.

Mr. Schaeffler said the technological implications of the partnership could be as important as the marketing advantages, noting that AT&T researchers will now probably be available to work on improvements to the DBS system. The deal will also cement an alliance of two of the nation's largest companies, since Hughes is controlled by General Motors Corp.

Mr. Nacchio said it is likely that AT&T's involvement will help lower the price of DSS dishes, which already have dropped from a minimum of $699 to $499 as the number of manufacturers has grown to more than half a dozen.

Lower prices for the dishes would help remove one of the primary obstacles to DBS' challenge to the cable industry.

"I suspect it probably got John Malone's attention," said Mr. Chartrand, referring to the president of Tele-Communications Inc., the nation's largest cable operator and a prospective bidder in tomorrow's FCC spectrum auction.

Stephen Effros, president of the Cable Telecommunications Association, said the deal does nothing to advance AT&T's paramount goal of reaching the local telephone customer while bypassing the regional Bell companies.

"Everybody knows that AT&T has been trying to reach agreements with local cable companies," Mr. Effros said. "Getting involved with DirecTV does not seem to advance the ball for them with regard to local telephony."

But Mark Chartrand, president of the Baltimore-based Didactech research firm, said AT&T's alliance with DirecTV shows that it might have learned something from past mistakes.

"Partners are better than buying. It's a lot easier to divorce than to sell," Mr. Chartrand said. "AT&T has had the smarts in this case."

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