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    Hughes could benefit from sale of subsidiary

    by C. Benjamin Ford * Staff Writer

    Apr. 25, 2003
    Hughes Network Systems Inc. of Germantown could benefit from General Motors Corp.'s plans to sell its subsidiary Hughes Electronics Corp. to News Corp. of Sydney, Australia.

    HNS, part of Hughes Electronics of El Segundo, Calif., is included in News Corp.'s $6.6 billion offer to General Motors. The deal is subject to shareholder and regulatory approval.

    HNS provides satellite Internet service to about 500,000 customers, including about 150,000 residential customers through its DirecPC service. The majority of the customers are businesses and government agencies who send data through HNS' satellite services.

    Matt Harrigan, a research analyst with financial investment company Janco Research Inc. of Greenwood Village City, Colo., said the acquisition is good news for HNS.

    "Certainly, News Corp. has the broadest global reach," Harrigan said. "News Corp. stands to benefit from developing satellite broadband."

    The merger can open up new marketing opportunities for the HNS satellite services when the company is expected to roll out Spaceway, HNS' high-speed satellite Internet system which uses the next generation satellites that operate in the ka-band frequencies, he said.

    HNS employs about 3,000 people, including 2,200 in Germantown. Company officials do not expect the employees to be affected.

    HNS lost $39.8 million in the first quarter of this year, compared to a loss of $48.5 million in the same period last year.

    EchoStar Communications Corp. of Littleton, Colo., had attempted to buy Hughes Electronics, only to have its deal blocked last year by federal regulators on anti-trust grounds. The move would have merged the two largest U.S. satellite television companies.

    EchoStar officials had touted the combined ability of the companies to further expand high-speed Internet service through satellites into rural areas, a move aimed at pleasing federal regulators and one that also would have benefited HNS.

    News Corp. officials have not made a similar statement about Internet satellite service, but Harrigan said he believes News Corp. would continue to offer it to compete with cable.

    HNS officials referred questions about the effect of the deal to a statement from Hughes Electronics.

    "This transaction is a win-win situation for Hughes and News Corp. and also for the residential and commercial customers of Hughes," said Jack Shaw, president and CEO of Hughes, in the prepared statement. "Hughes and its operating companies will be able to further enhance their strong management team and be in a much better position to achieve profitable growth and maximize cash flow."

    Although satellite broadband technology has been slower in development than DSL and cable modems, there are parts of the world where that is the only way for people to connect to high-speed Internet service, Harrigan said.

    The problem is making it economically feasible and finding a business model that works, he said.

    HNS officials have said they expect Spaceway to nearly double revenues by $1.1 billion.

    Hughes has invested more than $1 billion in development of the ka-band satellite services which has the potential to provide better Internet services, but the demand has not been there yet, he said.

    "They have the capacity to do residential broadband, but is it too much of a gamble?" Harrigan said. "There's a bit of wait and see."

    HNS also makes the systems for DirecTV, whose 11 million customers were the main target of the merger.

    News Corp. is expected to keep the manufacturing in-house, which also should help HNS, Harrigan said.

    HNS and Hughes made a conscious decision last year to slow back on aggressively marketing the high-speed Internet to residential customers because of the high acquisition costs and as a way to wait for the development of the better service offered by the next generation of satellites.

    But business customers have continued to sign up for the business enterprise level of service.

    HNS signed a contract worth $24 million with Gtech Corp. to provide satellite services to connect lottery ticket outlets with processing centers.

    The company also renewed a contract with BMW of North America to connect dealerships by satellite. * *

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