SSE Picks Right Time to Back Direct Broadcast
A Virginia satellite company bet on an emerging technology, and looks to wind up a winner
A potential nightmare for the cable television industry may be a dream come true for SSE Telecom Inc.
The McLean, Va.-based company is poised to profit from the initially enthusiastic consumer response to direct broadcast satellite (DBS) television. More than 500,000 consumers have invested $700 for the 18 inch satellite dishes and set top boxes necessary to pull down digital programming from the sky.
"It's really got the cable TV business in a sweat, a lot of them are really concerned because their best customers are going to the DirecTV approach," said Bill Bluestein, director of Forrester Research's people and technology strategy service.
DirecTV may have the market to itself for now, but competition is on the way, due in no small measure to SSE Telecom.
In 1982, the $30 million satellite earth station component and systems manufacturer had the foresight to apply for one of eight orbital slots allocated by the FCC . DirectSat Corp., an 80 percent-owned subsidiary of SSE, was awarded an assignment at 119 degrees west, a slice of the sky offering nationwide satellite coverage.
"We filed on the theory that this high powered broadcast opportunity might be worth something one day," said Daniel Moore, executive vice president and chief financial officer of SSE.
Upon receiving the license, SSE tapped Martin Marietta to build it a DBS satellite and began scouting for partners. It settled on EchoStar Communications Corp., a $200 million private company responsible for nearly half of the huge satellite dishes decorating the backyards of rural America. EchoStar, Moore said, had all the components - programming experience, a nationwide distribution network, and relationships with manufacturers and content providers - necessary for success in this next-generation satellite television business. And the company's wholly-owned subsidiary, EchoStar Communications Corp. owned an FCC DBS license as well. The two companies agreed to combine their licenses and just like DirecTV, will launch two birds to provide more than 100 channels of digital audio and video services nationwide by late 1995.
Moore actually welcomes his competitor's high profile advertising blitz. DirecTV, he said, is footing the bill to educate a market bigger than originally envisioned.
Bluestein agrees: "The cable TV guys have not faced any meaningful competition their whole lives, and many multiple-premium-channel people are saying they want out from the cable monopoly."
Although SSE's involvement in DBS has gone largely unnoticed, its core business has attracted the attention of some prominent industry watchers. SSE Telecom has been ranked among the best and/or fastest-growing small companies by Business Week (1994), Forbes (1993) and Inc. (1992), and has more than 9,000 transceivers and modems installed in some 75 nations.
The company ended its fiscal year in November with revenues of $30.2 million, or $.40 per share, versus revenues of $29.3 million, or $.37 per share, in fiscal 1993. EchoStar, which also agreed to purchase And the company's working capital during the past year increased from $5.8 million to $17.8 million. "Based on these trends, we are increasingly optimistic about the fiscal outlook for the new year," said SSE President Frederick Toombs. And SSE stands to reap benefits from the DBS business without sharing any of the headaches or costs associated with launching a nationwide service. Pending FCC approval, SSE is swapping its DBS license and stake in DirectSat Corp. for an approximately 3 percent equity interest in EchoStar. While a three percent stake in a company whose ambitious plans are many months and million of dollars from fruition may not seem like much, for a small company with minimum risk, the payoff could be immense.
"If EchoStar is very successful, the value of our ownership interest could equal the value of our current core business, a $30 million a year satellite hardware and system business." Bluestein said it's not too late for EchoStar, which has already raised $350 million for the venture, to get into the DBS business, adding that there is always room for two in any market.
John Bain, however, a telecommunications analyst with Raymond James & Associates, is skeptical of the entire DBS market's viability.
"DBS comes around every ten years, and there has never been a successful nationwide satellite service," Bain said. "It sounds nice and great, but the economics have never really been there. Comsat built two DBS satellites ten years ago and one is now a lobby ornament - the most expensive lobby ornament ever used."