During the past five years virtually every satellite operating company changed hands as private equity groups began to realize that, far from there being a glut of satellite capacity, there was a shortage on the near horizon, as broadcasting went through a series of revolutions as it added mobile TV and HD broadcast services.
So there is a kind of mad, improbably logic about the move by EchoStar announced this week to buy one of the hottest properties in new media distribution, place shifter Sling Media, and separate out the two core assets of EchoStar, its US DISH network, approaching saturation and its full valuation, and its technology and infrastructure assets. Sling Media produces the Sling Box which re-encodes analog video received in a home, and sends it encrypted to the wherever the owner is, over a broadband line.
It is the latter company, the technology and infrastructure business that would keep the name of EchoStar, which is the most interesting part of the split into devices, experience, and satellite capacity, both that which is currently available and in future committed new satellites, with a clear mission to get a piece of the action globally for wherever satellites can send directly to portable devices and handsets.
It was the experience of the group that led to it being awarded the contract to deliver the initial mobile TV services in China. CMBStar is an S-band satellite scheduled to be in place by the second quarter of 2008 in time for the Olympics, which will be leased to the Chinese authorities.
China was up against an impossible deadline for the introduction of new mobile TV services using home built, and largely untried technology. The chances are that if EchoStar gets the Chinese authorities out of a hole, and puts the satellite capacity into place on time, it may also get further contracts relating to the Chinese standard for digital TV to the home.
EchoStar also has great L band 1.4 GHz spectrum in the US from the February 2007 auctions, probably to start other mobile based business in the US, it is also planning to offer wholesale satellite capacity across the US with new satellites, both owned and leased, and it has just bought its way into the Korean S-DMB satellite company TU Media, as well as offering satellite services to a new DTH in the Philippines and it plans to offer extra value added services to the Dish network with new satellites.
The purchase of Sling Media is the icing on the cake, taking the company for a mere $380 million, which we are sure the investors of Sling feel is a high valuation, but to us it seems like a snip. Sling has some of the basic patents pending around place shifting. EchoStar knows only too well what such patents are worth if they are vigorously pursued, because the inventor of time shifted TV, TiVo, has been pursuing a case against EchoStar, which just went ahead and created its own DVR, instead of licensing the technology from TiVo. That case is going through the rounds of appeal, but has largely been won by TiVo and there is the potential for an avalanche of follow on licensing once the patents are established in a US court. EchoStar will be financially powerful enough to make sure that its Place shifting patents are rock solid legally, and may continue to acquire further patents in this area to strengthen its hand.
EchoStar also has its own patents in Digital Video Recorders, and if it could resolve its case with TiVo (or even buy the company) it might put place shifting and time shifting together as a single royalty base for exploitation globally.
All of which creates an entirely new playground for CEO Charlie Ergen. That’s something Ergen may need given the distinct possibility that Liberty Media could offer a great exit price for shareholders to merge the DISH network with his newly purchased DirecTV, to create the biggest pay TV operator in the US. If that was to happen it would happen around the second quarter next year, after the DirecTV deal closes.
That would have left Ergen with no vision to follow, whereas this preparatory split would neatly place all the assets that Liberty wants in one basket, and with the acquisition of Sling, leave Ergen the continuing game of becoming a global force in satellite distribution, with the keys to one of the most promising new technologies in placeshifting, and some powerful friends in the Chinese government.
‘As an early investor in Sling Media, EchoStar has been pleased with the progress and commitment the company has made establishing Sling Media and the Slingbox as powerful and beloved digital media brands,’ said Charlie Ergen, CEO and co-founder of EchoStar. ‘With today’s increasingly mobile lifestyle, EchoStar’s acquisition of Sling Media will allow us to offer innovative and convenient ways for our customers to enjoy their programming on more displays and locations, including TVs, computers and mobile phones, both inside and outside of the home. This combination paves the way for the development of a host of new innovative products and services for our subscribers, new digital media consumers and strategic partners.’
One of the big issues for mobile TV around the world is that when pushed by Cellcos it is aimed at creating a rival route to market against existing Pay TV services. Anything cellular creates a premium. Cellular voice is worth perhaps 5 times what fixed voice is. Cellular email costs considerably more and is considerably less useful than fixed email. So cellular TV will create a huge premium, and despite the fact that many people still cannot understand how anyone will watch TV on a tiny screen, it will take off and in 7 or 8 short years there will be more mobile TV receivers than there are Pay TV homes on the planet.
Place shifting is a way that pay TV services can fight back. A pay TV service goes to your home and that’s it, it can then be place shifted to wherever you are, including over the mobile web, and it can be part and parcel of the pay TV cost. By owning the leading proponent of that technology EchoStar is putting a big stake in the future of portable entertainment, which will definitively be on the side of all pay TV owners.
And by opening that technology up outside of the US, in China and Korea to start with, places that are known to be fascinated with gadgetry and where EchoStar already has early business relationships, it is in a strong position to take a global stranglehold on the new technology, in a way that TiVo failed to achieve with the Digital Video Recorder.
And this transaction has something of the look of what might be a series of Liberty and EchoStar dealings. Already under its own steam Sling Media attracted UPC in the Netherlands, a cable company owned by Liberty Global, into a relationship where it will resell the device. Is that because Liberty owns a piece of Sling, or is that because Liberty is greasing the wheels of a deal to acquire DISH? It would be easy to imagine a discussion between Ergen and Liberty’s John Malone, where each talked through trade offs.
‘If you want DISH, then I want to be a satellite supplier to DirecTV AND DISH, and I want you to take devices from me. I’ll buy your shareholding in Sling, in fact I’ll buy the company, and you use Sling in every territory you own a pay TV service, we can start in the Netherlands’ ‘ we might imagine Ergen saying.
We might also imagine Malone using EchoStar as leverage to deliver content to the Chinese digital TV market. We might also imagine EchoStar talking about the portable media players from French company Archos, which it also owns 26% of, and how Sling software could run on the devices, or leveraging its shared conditional access business with Nagravision to protect the content on Sling boxes and keep it under the control of the pay TV operator. All of these might be possible.
One of the problems with both Sling and with Archos devices which are currently used as portable DVRs for the DISH service, is that they are too expensive. There are three ways to attack that, open them up to larger volumes by making the devices globally available; build them in partnership with a major Chinese ODM, and possibly subsidize them with advertising.
One of the patents that Sling has applied for is the idea of dropping new advertisements into the programming that has been placeshifted, splicing in adverts that are relevant for the place it is shifted to, as well as diverting some of the advertising revenue to Sling. It already has buttons on its services offering to upgrade US customers’ broadband line, a service it gets royalties on through a US ISP called GetConnected which will upgrade Sling users’ broadband lines through existing resale relationships it has with major ISPs including Comcast and Time Warner Cable. Just as easily that button could be used to promote the Clearwire (and Sprint) WiMAX based broadband lines, as part of its relationship with the merged Clearwire Sprint network, to offer DISH a return path for the resale of broadband services ‘ voice and internet access.
In fact we could imagine that conversation between Ergen and Malone including a discussion about DirecTV perhaps letting EchoStar manage and keep the entire Clearwire relationship, in partial return for the sale of DISH.
It becomes two companies ‘ one a merger of DTH services between DirecTV and DISH – the other a technology business free to sell to cable and telcos alike, with little or no allegiance to any particular pay TV operator. Malone has already said that he would want to merge conditional access if the two DTH services were to be merged, and who better than to take the service from than the company with the US Nagravision license, NagraStar, jointly owned by EchoStar and Nagra parent Kudelski.
And after all, it would be hard for Comcast to contemplate taking products like the Sling box if that company is owned by its DTH rivals, so as soon as Comcast agreed earlier this year that it would test the Sling Boxes, there was a chance that ownership of Sling would change.
If Comcast can agree terms to take Sling boxes to market then that might lead to a hail of requests to include placeshifting within existing set tops for many of the world’s largest pay TV operators, just as they did with DVRs.
Again that might also represent new advertising opportunities and also EchoStar would be well placed to design that in, having its own US and UK set top box design teams, who would be part and parcel of the technology and infrastructure side of a split EchoStar and who shipped 9 million set tops last year. A deal to see the company as a converged set top supplier to DirecTV could give a potential 50% hike to this overnight.
The move to buy Sling Media will also push EchoStar into User Generated Content, with a product called Clip and Sling, which allows short snippets of TV programs to be sent to friends or placed on web sites for shared viewing, not just by the pay TV customer. There may be some copyright issues here, but another patent of Sling Media relates to sharing the advertising on the ‘Slung’ content on the web site with the original content owner, which may help get around that and create another YouTube effect.
Unlike some of the best media inventions in the US such as TiVo, Sling Media has already managed to get its Slingbox across the Atlantic and into shops, in the UK to start with, through PC World and electrical retailer Currys, and the rest of Europe is just being courted with the ink on the UPC deal not yet dry.
Sling Media had raised $57 million in two slices in November 2004 and January 2006.
So far the Board of Directors of EchoStar has only directed management to look into a separation of its businesses and it will have to get the Internal Revenue Service in the US to agree that it will be a tax-free transaction, giving pro rata shareholdings in both companies to shareholders.
The result of all this is that any valuation of the new technology based EchoStar would likely to climb aggressively, as it becomes clear that the split will happen, and a prospectus finally describes just what is in the melting pot.