Hughes deal to speed up cable mergers, new services

Reshma Kapadia

NEW YORK: Cable companies may consolidate and offer new services faster

following the proposed $26 billion merger of General Motors Corp.'s satellite

unit and EchoStar Communication Corp., analysts said Monday.

Cable operators and satellite companies have always been rivals, but

EchoStar's purchase of Hughes creates an even more formidable rival to companies

such as AT&T Broadband, AOL Time Warner Inc., Charter Communications Inc.,

Comcast Corp., and Cox Communications Inc. However, most analysts do not expect

the deal to weigh on cable operators in the near term, but it may get the flame

burning under new services.

"If you think about what DirecTV did to cable, it made them step up

their game a little bit," said Richard Gay, partner in consulting firm Booz

Allen's Communications, Media, and Technology practice. With this deal, cable

operators will have a more formidable and identifiable rival but they will have

time to make strides and push through new services, such as video-on-demand,

while EchoStar and Hughes sort out details of the merger, which will likely

entail a lengthy regulatory review.

"One could paint a scenario that this is good news for the cable

companies because there is potential for divergence of focus in the (satellite)

industry as they focus more on deal-oriented issues versus the nuts and bolts of

day-to-day things. It could put them behind (in terms of service and

technologies)," said ABN Amro analyst John Martin.

Morgan Stanley Dean Witter analyst Vijay Jayant said the deal will help

satellite providers cut costs as they remove duplicate channels and rework

retail pacts. The savings in costs and bandwidth will open the door to

investments in new services, such as high-speed access and interactive

television, and some flexibility in pricing.

PWC Consulting's global lead strategy partner Saul Berman said the

consolidation could also result in higher prices, as has been the case in the

digital subscriber line market. While some analysts said cable operators had a

window of opportunity to deploy new services to better compete with a stronger

satellite opponent, Berman said it involved more than just making decisions to

do so, such as getting in infrastructure in place.

"There's also a strategy issue. How do you respond? Do you consolidate,

get more aggressive, or continue to try to go ahead at a steady pace and try to

assure returns to your investors," he added.

Consolidation could ensue

Analysts also said the deal could spark a more frenzied wave of consolidation

among cable operators. "This is a capital-intensive, got to get a bang for

your buck climate. This is not going to be the last deal we are going to

see," Gay said.

AT&T Corp.'s cable unit, the nation's largest, has been in a courting

dance with Comcast. The two companies signed a confidentiality pact late

September, which could pave the way for talks on Comcast's $37.8 billion offer

to buy AT&T Broadband.

But most analysts said this deal would not alter the course of the talks

surrounding AT&T Broadband since those discussions had likely factored in

some sort of a deal for Hughes.

Better Charlie than Rupert

EchoStar's victory over Rupert Murdoch's News Corp Ltd., which was also

bidding for Hughes, bodes better for the cable industry, analysts said. "I

think the cable industry would rather have Charlie Ergen at the head of this

instead of Rupert Murdoch. Charlie is an economical animal and there's some

question that Murdoch... could give the product away. (The new entity) would be

much more economically irrational which would be to the detriment of the cable

operators," said Merrill Lynch analyst Jessica Reif Cohen.

Reif Cohen agreed that the EchoStar outcome was one of the better scenarios

for cable operators. "News Corp. is a super-aggressive marketer with much

stronger cross-promotion platforms such as networks, TV stations and

cable," she said.

Most analysts said the deal would have little short-term impact on the cable

sector. "If you're not an upgraded cable operator, offering a suite of new

services, then it's going to be very difficult to compete versus this kind of

entity," said CIBC World Markets analyst Jeff Wlodarczak. "But, if you

are a fully upgraded cable operator, I don't think they are going to be quaking

in their boots."

(C) Reuters Limited.