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Tuesday, June 04, 2002

StarBand claims merger was blocked


Satellite-based Internet service provider files for bankruptcy protection

By BRUCE MEYERSON
AP Business Writer

        NEW YORK — StarBand, a satellite-based Internet service, has filed for bankruptcy, accusing former partner EchoStar of trying to force its failure as a tactic in its bid to merge with satellite rival DirecTV.

        The bankruptcy petition, filed Friday in a Delaware court, charges that EchoStar, owner of the Dish Network satellite TV service, has withheld “millions of dollars” in fees collected from StarBand customers who subscribe through a Dish account.

        On Monday, the bankruptcy court approved a motion by lead investor Gilat Satellite Networks to provide financing of $2.8 million, roughly the amount StarBand says it is owed by EchoStar, to keep the service running.

        EchoStar, which is seeking regulatory approval to buy DirecTV parent Hughes Electronics, denied any responsibility for StarBand's “unsuccessful” business model, but declined to comment specifically on StarBand's charges, which were also included in a separate suit filed last week in Virginia. A spokesperson said EchoStar does not comment on pending litigation.

        Although it stopped marketing the StarBand service to its subscribers in February, EchoStar continues to handle billing for about 31,000 of StarBand's 41,000 customers. StarBand also complained that EchoStar's has intentionally refused to transfer those accounts to its control. Until that happens, Starband said, potential investors won't provide the $25 million to $30 million needed to keep the company afloat long enough to turn profitable.

        The merger with DirecTV, whose high-speed DirecWay service is StarBand's main rival, would combine the two leading providers of satellite television and create the nation's biggest pay-TV service.

        EchoStar and Hughes argue that their merger wouldn't create a monopoly for pay TV because they still compete with regular cable providers. They also contend that they need to combine operations to shoulder the high costs of running a satellite system while expanding and improving service.

        StarBand alleges that EchoStar is trying to bolster its case to regulators by showing that StarBand is not a viable business.

        “EchoStar has been very public about their position that high-speed Internet via satellite cannot happen in an efficient manner unless it merges with Hughes,” StarBand President David Trachtenberg said Monday in an interview. “It is in EchoStar's interest to point to failed business models to prove this point.”

        On the other side, EchoStar contends that it has changed its Internet strategy because StarBand was a failure. Last month, EchoStar wrote off its $100 million investment as a founding partner of the StarBand venture as worthless. In April, EchoStar executives who held four of the seven seats on StarBand's board of directors resigned.

        As a replacement for StarBand service, EchoStar has forged partnerships with EarthLink and the telephone company SBC communications to offer DSL, a high-speed Web connection delivered over telephone wires.

        “For EchoStar to point to where StarBand is today is because of a failed business model is disingenuous,” said Trachtenberg. “EchoStar's actions have forced us to slow down our growth and ultimately stop our growth in terms of our distribution channel.”

        Gilat owns 36 percent of StarBand, while EchoStar owns a 32 percent stake. Other investors have included Microsoft, which briefly offered its own MSN brand of StarBand service, but also stopped selling it.

       



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- StarBand claims merger was blocked
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