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-------------------------------------------------- Telecommunications Reports presents.... TR DAILY Oct. 29, 2001 -------------------------------------------------- PLEASE NOTE: This electronic publication is copyrighted by Telecommunications Reports International. Redistribution or retransmission of any part of this electronic publication -- either internally or externally -- is strictly prohibited. Violation will be cause for immediate termination of your sub- scription and liability for damages. You may print out one hard copy for your personal use. If you are interested in having this publication sent to colleagues at your company, additional authorized recipients may be added to your subscription for a fee. Call Subscriber Services, at (800) 822-6338, or send an e- mail to customerservice@tr.com for more details. If you prefer not to receive TR Daily, please reply to customerservice@tr.com. -------------------------------------------------- Table Of Contents Click here for the full issue: http://www.tr.com/online/trd/2001/td102901/index.htm PROMISE OF RURAL BROADBAND SERVICE, CABLE TV COMPETITION MAY NOT BE ENOUGH TO SAVE EchoStar-HUGHES MERGER =20 http://www.tr.com/online/trd/2001/td102901/Td102901.htm FINANCIAL HURDLES AWAIT EchoStar-HUGHES http://www.tr.com/online/trd/2001/td102901/Td102901-01.htm DESPITE PACKED AGENDA, LAWMAKERS TAKE ON RURAL BROADBAND DEPLOYMENT, FCC UNE RULES =20 http://www.tr.com/online/trd/2001/td102901/Td102901-02.htm FCC, CARRIERS WORK ON DETAILS =20 TO RESOLVE NextWave DISPUTE http://www.tr.com/online/trd/2001/td102901/Td102901-03.htm ALAMOSA RAMPS UP THIRD QUARTER REVENUES, BUT NET LOSS WIDENS BY $20 MILLION http://www.tr.com/online/trd/2001/td102901/Td102901-04.htm TELECOM EARNINGS ROUNDUP http://www.tr.com/online/trd/2001/td102901/Td102901-05.htm NEWS IN BRIEF=20 http://www.tr.com/online/trd/2001/td102901/Td102901-06.htm **************************************************************** PROMISE OF RURAL BROADBAND SERVICE, CABLE TV COMPETITION MAY NOT BE ENOUGH TO SAVE EchoStar-HUGHES MERGER =20 Charles Ergen today told regulators what they like to hear ? that he could provide rural broadband service and cable TV competi- tion. But the chairman and chief executive officer of EchoStar Communications Corp. might find that encouraging words aren't enough to win approval for EchoStar's effort to merge with Hughes Electronics Corp. On the surface, the merger of the two largest providers of direct broadcast satellite (DBS) service would seem as ill-fated as WorldCom, Inc.'s attempt to buy Sprint Corp. ? a merger of the second and third largest long distance carriers. But Mr. Ergen says that's an "apples-to-oranges" comparison. He's confident that regulators will look at the broader picture, in which EchoStar and Hughes are providers of pay-TV service, not just DBS service. In that universe, he insists they are small fish that need to get bigger to compete against AT&T Broadband, AOL Time Warner, and the other sharks in the cable TV ocean. Attorneys at the Department of Justice "totally do understand this industry," he said this morning during a press conference.=20 "While there certainly are concerns that regulators will have, this transaction ultimately will be approved," he said. "We'll work with regulators and Congress to alleviate their concerns." Even before the ink was dry on the merger agreement, Mr. Ergen began offering conditions to make the merger more palatable to policy-makers. He said he would agree to a national price plan so that rural customers don't pay more than urban customers. The merger would leave a few million rural customers with a single provider of pay-TV service, and there will be worries that those customers could be gouged. Mr. Ergen hinted that additional conditions would be offered, but he declined to say what they were. "You don't negotiate those in the press," he said. "We've made a $600 million bet that this transaction will be completed," he said, referring to the breakup fee that EchoStar will pay Hughes if regulatory concerns derail the merger.=20 Blair Levin, an analyst with Legg Mason Wood Walker, Inc., expects derailment. A national pricing plan is not enough to win over DoJ, he said today in a report. "Such a proposal would involve DoJ in ongoing price and service regulation, which it is loath to do. Moreover, price is only one benefit of competi- tion." "EchoStar would have to convince DoJ officials that any negative consequence of the transaction would be offset by a positive impact: that the combined EchoStar-[Hughes] would provide a more viable competitor to cable TV," Mr. Levin said. He noted that a similar tactic failed in the WorldCom/Sprint deal. Those compa- nies argued that they should be allowed to merge to create a more powerful competitor in the local-service market. But their potential to dominate long-haul markets did them in. Opponents, some of them powerful, already are taking aim at the EchoStar/Hughes deal. Cable TV operators will oppose it, as will News Corp. Ltd., a jilted contender for Hughes. A merger of EchoStar and Hughes "means there will be no choice for millions of television consumers in rural America," News Corp. Chairman and CEO Rupert Murdoch said. Mr. Murdoch "has no intention of waving the white flag and may pursue a number of strategies in an effort to block this transac- tion," said David Kestenbaum of ABN-AMRO. He suggested that "leading banks with strong ties to News Corp. may be wary of participating" in funding the EchoStar-Hughes transaction. Northpoint Technology, Inc., which is seeking to launch a terres- trial service that would share DBS spectrum, said the EchoStar- Hughes merger agreement "caps a long history of anticompetitive conduct by the satellite industry and demonstrates their failure to provide competitive choices for rural Americans." The FCC surely could not have foreseen that the free spectrum it issued to several major DBS companies a decade ago would come to be controlled by a single monopolist," Northpoint President Sophia Collier said. The proposed merger is likely to generate hearings in the various congressional committees with jurisdiction over telecommunica- tions and antitrust issues. Senate Commerce, Science, and Transportation Committee Chairman Ernest F. Hollings (D., S.C.) vowed today to give the proposed merger a close look, saying he was "troubled by the prospects of the two largest satellite companies becoming one. That kind of consolidation would leave consumers with few, if any, choices," he said. "Our committee will continue to look into this and other consolidation matters." The Senate Judiciary Committee is also planning to examine the proposed merger before Congress adjourns later this year, a spokesman said. Sen. Mike DeWine (R., Ohio), the ranking member of the antitrust, business rights, and competition subcommittee, said that while the proposed merger "clearly raises serious antitrust concerns, they are not necessarily fatal to the deal." "If this merger is completed, millions of consumers that now have the benefit of competition for subscription TV may find their choices narrowed to just two providers," he said in a statement today. "By the same token, the merger of these two companies could generate efficiencies that allow the combined company to provide new local services to a number of small and midsize markets. Furthermore, this deal may create a stronger satellite competitor that is better able to aggressively compete head-to- head with" the cable TV industry, Sen. DeWine said. =20 ? Tom Leithauser, tleithauser@tr.com Ryan Oremland, roremland@tr.com *************************************************************** FINANCIAL HURDLES AWAIT EchoStar-HUGHES In addition to regulatory hurdles, EchoStar Communications Corp.'s effort to merge with Hughes Electronics Corp. must overcome some financial obstacles. The companies will need $5.5 billion to complete the transaction and hope to get that amount from capital markets that can best be described as stingy. If capital markets don't cooperate, the companies have arranged two $2.75 billion bridge loans from Deutsche Bank and General Motors, Hughes?s parent company. The GM bridge commitment is secured by a pledge of $2.75 billion of EchoStar stock held in a trust controlled by the company?s chairman and chief executive officer, Charles Ergen. He put up the stock after another bank backed out of the deal, the companies said. The transaction, valued at $30 billion, will be accomplished in stages. First, Hughes will be spun off from GM. Then EchoStar will be merged into Hughes. The resulting entity will be called EchoStar and will offer service under Hughes's DirecTV brand name. DirecTV has more than 10 million subscribers, while EchoStar's DISH Network serves about 6.4 million customers. Hughes also had a buyout offer from News Corp. Ltd., but GM decided the EchoStar bid was superior. "When we added up the value we saw in the relationship with EchoStar it just far exceeded any other option," said Jack Shaw, CEO of Hughes. The companies expect to complete the transaction in the second half of next year. ? Tom Leithauser, tleithauser@tr.com **************************************************************** DESPITE PACKED AGENDA, LAWMAKERS TAKE ON RURAL BROADBAND DEPLOYMENT, FCC UNE RULES =20 Congress's work on antiterrorism legislation and national securi- ty matters may have relegated most big-ticket telecom items to the legislative backburner in recent weeks, but that hasn?t stopped some key lawmakers from forging ahead on bills to spur broadband service deployment in rural areas, and examine the FCC's unbundled local switching rules. =20 =20 In fact, with little fanfare, the Senate recently approved a fast-track bill to set up ?competitively neutral? telecom grant programs in rural areas that don't have basic, dial-up Internet access services. Added as an amendment to the fiscal year 2002 spending bill for the Department of Agriculture by Sen. Thad Cochran (R., Miss.), the legislation would permit the Secretary of Agriculture to distribute grants to the state public service commissions, which in turn would oversee the establishment of grant programs to encourage carriers to build advanced networks and provide "affordable broadband" services in Internet-starved communities. The Senate approved the overall spending bill last Thursday, Oct. 25, by a 91-5 vote. =20 Other efforts to stimulate broadband service deployment through financial incentives have also picked up in the House. There, Minority Leader Richard Gephardt (D., Mo.) has joined with several Democrats to urge the Senate leadership to consider attaching broadband tax credit legislation to that chamber's "economic stimulus" package. Writing last week to Senate Majori- ty Thomas A. Daschle (D., S.D.) and Finance Committee Chairman Max Baucus (D., Mont.), the lawmakers touted the Broadband Internet Access Act (S 88, HR 267) as a way to increase network connectivity, security, productivity, and infrastructure invest- ment in rural communities. The legislation has 189 cosponsors in the House and 62 in the Senate, they said. "Clearly, such broad support indicates the need to extend a high-speed information system to all Americans.=20 This legislation provides the vehicle for delivering such a system, and we urge you [to] include it in the stimulus package," said the Oct. 25 letter, which was signed by Reps. Gephardt, Robert Matsui (Calif.), Anna Eshoo (Calif.), Rush Holt (N.J.), Zoe Lofgren (Calif.), Ellen Tauscher (Calif.), Rosa DeLauro (Conn.), Mike Honda (Calif.), and Nancy Pelosi (Calif.). Meanwhile, the House Small Business Committee plans to revisit the telecom scene this week with a Nov. 1 hearing to review small businesses' access to telecom services and "whether a decision by the FCC unduly restricts access by small businesses to competi- tive telecom services." The hearing is set for 2 p.m. in the panel's regulatory reform and oversight subcommittee, which held a pair of telecom-related hearings earlier this year (TR, May 21 and May 28 ). =20 A subcommittee aide told TR Daily today that the "major focus" of the hearing would be the FCC's rules governing when an incumbent local exchange carrier (ILEC) must make unbundled local switching available to carriers that provide service by leasing a platform of combined unbundled network elements (UNE-P). Under existing rules, ILECs don't have to provide unbundled switching when CLECs plan to use the network element to service business customers with four or more lines in a "density zone 1" pricing area in the top 50 metropolitan statistical areas. Debate over access to unbundled local switching has been conten- tious, pitting competitive local exchange carriers against the incumbent telcos and, at times, against each other (TR, March 19, 2001). UNE-P--based carriers are urging the FCC to expand the availability of unbundled local switching, while CLECs that have their own switches and incumbent LECs are advocating that the Commission scale it back. Last week, for example, Verizon Communications, Inc., asked the FCC to eliminate or "significant- ly limit" ILECs' obligations to provide local switching to competitors as a UNE (TR, Oct. 29). Former Small Business Committee Chairman James M. Talent (R., Mo.) was highly critical of the FCC's rules regulating the provision of UNEs to competitors, saying they were hindering UNE- P carriers from obtaining the necessary switching services to serve small-business customers (TR, July 24, 2000). =20 While Rep. Talent may no longer hold the gavel, the Small Busi- ness committee's position on the FCC's unbundled local switching rules "hasn't changed," the committee aide said today. The committee is "still very concerned that the FCC's UNE rules violate the Small Business Act and the Regulatory Flexibility Act. . .because they hinder small companies from obtaining telecom services," the aide said. ? Ryan Oremland, roremland@tr.com =20 **************************************************************** FCC, CARRIERS WORK ON DETAILS =20 TO RESOLVE NextWave DISPUTE The FCC and other parties involved in negotiations to resolve the NextWave Telecom, Inc., dispute are still exchanging draft settlement documents, a source told TR Daily on Monday. Sources last Friday said all the parties had reached a settlement to the five-year saga over NextWave's "C" and "F" block PCS (personal communications service) licenses and were hammering out the final details (TR, Oct. 29). "There's still a lot of details that have to be worked out," one source said today. Sources have said the FCC hoped to announce the settlement early this week. As part of the agreement, NextWave would walk away with about $5 billion, while the U.S. government would get about $11 billion. Under an additional stipulation, NextWave has agreed to pay Verizon Wireless about $120 million and AT&T Wireless Services, Inc., between $25 million and $30 million, a source said. The payments are designed to cover the amount the carriers have lost in interest on deposits they paid the government for NextWave spectrum they bid on at an auction earlier this year, the source said. The money also will pay the costs of providing bank letters of credit, the source said. Those letters will be provided in January 2002 by Verizon Wire- less and Alaska Native Wireless LLC--which is partly owned by AT&T Wireless. The two carriers were the top bidders at the auction. In addition, NextWave has agreed to pay the federal government $50 million, the source said. =20 ? Paul Kirby, pkirby@tr.com **************************************************************** ALAMOSA RAMPS UP THIRD QUARTER REVENUES, BUT NET LOSS WIDENS BY $20 MILLION Alamosa Holdings, Inc., which sells Sprint PCS service in 15 states mostly in the West and Southwest, generated booming sequential revenue growth of 27% during the third quarter but also saw its net loss balloon to $37.7 million as a result of the rapid addition of new customers.=20 For the quarter ended Sept. 30, Alamosa posted total revenue of $107.8 million, up from $23.2 million in the same quarter last year. Of the third quarter total, $67.5 million was subscriber revenue and $31.5 million was roaming revenue. Alamosa added 88,000 customers to its rolls during the quarter, ending the period with 404,000 subscribers. "We had a tremendous third quarter fueled by phenomenal customer acquisitions," declared David Sharbutt, chief executive officer, in a conference call today. The rapid customer growth was fueled in part by an increased push for sales under Alamosa's "automatic spending limit" program. The ASL program requires no customer deposit to begin service but limits the customer to $125 of charges. It allows Alamosa to refuse to provide additional service above the customer's spending limit. While the ASL program allows customers with higher credit risk to obtain service, bad debt expenses are held down by the $125 limit, company executives explained. As of Sept. 30, a total of 39% of Alamosa's customers were on the ASL plan versus 31% at June 30. "Results to date [from the ASL program] have been better than our expectations," explained Mr. Sharbutt. The CEO added that ASL program customers yield higher average revenue per user (ARPU) results than regular customers and this metric tends to offset a higher customer churn rate within the group. For the quarter, Alamosa's monthly ARPU trended slightly higher, to $92 per customer from $91 during the second quarter. Churn rates for the third quarter rose to 2.7% from 2.4% in the second quarter. Kendall Cowan, chief financial officer, offered that third quarter churn rates were not alarming, as "second quarter churn was unusually low for a company like us." He speculated that increased churn may be a result "possibly of the slowing in the economy, though we are seeing no indication of that in areas of the country that we cover." =20 At least one Wall Street analyst was less optimistic about results driven by the ASL program. "Although things are working well right now, we are concerned about potential repercussions of the ASL program; namely higher churn and bad debt expense in the future," commented Cynthia Motz of Credit Suisse First Boston.=20 Going forward, Alamosa executives nudged upward full-year expec- tations on customer count to a range of 500,000 to 525,000 from a prior range of 425,000 to 465,000. At the same time, Alamosa increased its full-year EBITDA (earnings before interest, taxes, depreciation, and amortization) loss forecast to a range of $55 million to $60 million from the prior guidance of $38 million to $53 million. =20 Lending assistance to better bottom-line performance, Alamosa cut its full-year guidance on capital expenditures to a range of $140 million to $150 million from the previous estimate of up to $160 million. Echoing the drive toward better profitability, Mr. Sharbutt commented: "We continue to see improvements in operat- ing efficiencies as we are nearing the completion of our network buildout and have transformed the company from being in the mode of launching markets quickly to adding subscribers and operating those markets in the most productive manner." He added that Alamosa expected to begin offering third generation (3G) services in the middle of next year, but he didn't say what the financial effect of that would be. ? John Curran, jcurran@tr.com **************************************************************** TELECOM EARNINGS ROUNDUP=20 Grupo Iusacell SA de C.V., a wireless cellular service provided based in Mexico City, grew third quarter revenues to $1.68 billion, up 16% from the year-ago quarter. For the most recent quarter, Grupo Iusacell generated EBITDA (earnings before inter- est, taxes, depreciation, and amortization) of $771 million, including gains from sales of dark fiber and cellular towers. =20 Excluding the one-time gains, EBITDA for the third quarter grew to $576 million, up 8% from last year.=20 Telesp Celular Participacoes SA, holding company for the leading cellular service provider in Brazil, reported that revenues for the first nine months of 2001 totaled $798.5 million, up 6% from the comparable period last year. EBITDA for the nine-month period amounted to $249.4 million, up 0.8% from last year.=20 KPNQwest NV posted third quarter revenues of $178.5 million, compared with $119.9 million of revenues in the year-ago quarter.=20 For the most recent quarter, the company generated positive EBITDA of $2.4 million versus an EBITDA loss of $28.1 million a year ago. Net loss for the latest quarter grew to $54.6 million, from $21.5 million, largely because of higher depreciation and amortization expenses. Based on the nine-month results, KPNQwest increased its full-year revenue guidance by about $18 million, to a total of $723 million. =20 Deltathree, Inc., the Internet telephony provider formerly controlled by RSL Communications, said third quarter revenues fell to $3.4 million, from $8.5 million in the year-ago quarter, primarily due to the bankruptcy of RSL, deltathree's largest customer. The firm?s net loss improved to $6.2 million in the most recent quarter, from $10.3 million a year ago.=20 Wireless Telecom Group, Inc., posted third quarter revenues of $4.2 million, accompanied by a profit of $718,000. In the comparable quarter last year, the firm had revenues of $4.7 million and net income of $543,000. Based in Paramus, N.J., Wireless Telecom makes test equipment for measuring power of RF and microwave systems used in multiple telecom markets.=20 **************************************************************** NEWS IN BRIEF Nokia Corp.'s board has extended Jorma Ollila's contract as chairman and chief executive officer through 2006. He joined Nokia in 1985, was appointed president and CEO in 1992, and became chairman and CEO in 1999.... Lance B. Boxer has been named president and chief executive officer for Sphera Optical Networks, Inc. He was president and CEO with Somerset, N.J.-based content-delivery developer XOSoft, Inc. Sphera builds metropolitan area networks and is based in Edison, N.J.... Polaris Networks, Inc., has named William C. Tucker vice presi- dent-marketing. He was VP and general manager of Ramp Networks Europe. Polaris, based in San Jose, Calif., makes optical transport switching systems.... The FCC is seeking comments on a petition for reconsideration filed by the Cellular Telecommunications & Internet Association related to the allocation of spectrum for third-generation (3G) wireless services. Oppositions to the petition are due 15 days after the public notice of the petition is published in the "Federal Register." Replies to oppositions are due 10 days after that. In its petition filed Oct. 15 in Engineering and Technolo- gy dockets 00-258 and 95-18 and International docket 99-81, CTIA asked the Commission to reconsider its denial of the group's earlier request that it reallocate the entire 2 gigahertz mobile satellite service band for other services (TR, Aug. 13). "The Commission has neither followed its own regulations, which require that the petition be placed on public notice, nor clearly articulated any basis for the denial," CTIA argued. **************************************************************** TR DAILY Copyright 2001 Telecommunications Reports International, Inc., (ISSN 1082-9350) is transmitted weekdays, except for holidays. Visit us on the World Wide Web at http://www.tr.com.=20 Published by the Business & Finance Group of CCH INCORPORATED. Editor: John Curran Associate Editor: Tom Leithauser Associate Editor: Ryan Oremland Associate Editor: Ed Rovetto Publisher: Stephen P. Munro 1333 H Street, NW, 1st Floor-East Tower, Washington, DC 20005 Editorial Information: Telephone: (202) 312-6060 Fax: (202) 312-6111 Email: jcurran@tr.com tleithauser@tr.com Customer Service: Telephone: (202) 312-6050 (877) 874-8737 Fax: (202) 312-6116 Email: customerservice@tr.com Federal copyright law prohibits duplication or reproduction in any form, including electronic, without permission of the publisher.=1A
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