U.S. Satellite Broadcasting Company, Inc.

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U.S. Satellite Broadcasting Company, Inc.

3415 University Ave.
St. Paul, Minnesota 55114
U.S.A.
(612) 645-4500
Fax: (612) 642-4578
Web site: http://www.ussbtv.com

Public Subsidiary of Hubbard Broadcasting Inc.
Incorporated: 1981 as United States Satellite Broadcasting Company, Inc.
Employees: 116
Sales: $191.99 million (1996)
Stock Exchanges: NASDAQ
SICs: 4841 Cable & Other Pay Television Services

U.S. Satellite Broadcasting Company (USSB), Inc., a publicly traded subsidiary of Hubbard Broadcasting, Inc., is a pioneer and leading provider of Direct Broadcast Satellite (DBS) subscription television services to the United States and to part of Canada and Mexico. From its National Broadcast Center located in Oakland, Minnesota, USSB broadcasts high-quality digital television signals to customers equipped with Digital Satellite System (DSS) equipment—consisting of an 18-inch satellite dish, digital receiver, and remote control—via five of the 16 transponders of a satellite transmitter owned by USSB and partner DirecTV, a subsidiary of the satellite’s manufacturer, Hughes Corporation. USSB’s satellite transmissions, which use MPEG-II digital compression technology, provide laser-disc quality video and CD-quality sound, with no degradation of quality regardless of customer location. Set-top receivers are also equipped with ports for eventual data transfer to customer computers.

Launched in June 1994, USSB already attracted more than a million subscribers by the beginning of 1997, compared to a total installed base of DSS home receiver systems of approximately two million. Industry analysts expect DSS penetration to reach more than 10 million households by the year 2000. USSB offers subscribers a choice of 10 programming packages, ranging from its $7.95 per month basic service to its premium $34.95 per month Entertainment Plus package, which features 25 channels, including MTV, Comedy Central, Lifetime, Nick at Nite’s TV Land, and up to 16 channels of movie programming through multichannel services such as HBO, Showtime, and Cinemax. USSB broadcasts also feature pay-per-view programming and CD-quality radio broadcasts, as well as CNN-rival All News Channel, originally developed by Hubbard Broadcasting through a partnership with Viacom. DSS owners also have the option of subscribing to USSB partner DirecTV’s 200-channel broadcast service. The partners, while operating as competitors, present largely complementary programming— DirecTV’s programming emphasizes sports and pay-per-view in contrast to USSB’s movie channels. More than two-thirds of customers subscribing to DirecTV also purchase USSB subscriptions. DirecTV investor AT&T has also agreed to promote USSB’s services to its 90 million long-distance customers.

Led by the Hubbard family—Stanley S. Hubbard is chairman, and sons Stanley E. and Robert are, respectively, president and CEO and executive vice-president—USSB has posted strong gains in revenues since launching its satellite services. In the company’s fiscal year ending July 1996 the company posted sales of $192 million. The company has yet to show a profit, with losses mounting to $95 million for the 1996 fiscal year. Nonetheless, the introduction of DSS has been considered one of the most successful electronics product launches in history and USSB hopes to reach its break-even point of 1.6 million subscribers by the end of 1997.

Looking to the Sky in 1981

The Hubbard family already had a long history as broadcast pioneers before the introduction of the DSS system. Company founder Stanley E. Hubbard started out in radio in 1923 with WAMD—Where All Minneapolis Dances—the first radio station in the country to generate revenues solely through advertising. In 1948, Hubbard turned his attention to the nascent television industry, purchasing a camera and forming the first independent NBC affiliate station. Hubbard also introduced what would become an industry mainstay—the 10 p.m. nightly news broadcast—before purchasing a color television camera and becoming the first television station in the country to broadcast entirely in color. The Hubbard television empire would eventually grow to include nine television stations, two radio stations, and affiliated companies including Conus Communications and the All News Channel.

Son Stanley S. Hubbard was named president of Hubbard Broadcasting in 1967 and was later named CEO in 1983. By then, the younger Hubbard—continuing the family tradition— had already recognized the potential of a new broadcasting technology, satellite transmission. In 1981, when the Federal Communications Commission announced its intention to offer licenses for the newly developed DBS spectrum of satellite transmission, Hubbard formed United States Satellite Broadcasting Company, Inc. and became one of the first, and the few, to apply for the new licenses. USSB was granted its DBS license in 1982. Hubbard proposed launching a three-channel broadcast service, which would be funded by advertising revenues and be received directly by homes or made available to other television stations for rebroadcast.

Home satellite reception was not entirely new. In the late 1970s, a number of people had discovered that they could tap into HBO and cable television satellite feeds using backyard satellite dishes. During the 1980s, a new business sprung up around sales of satellite dishes capable of receiving these transmissions. Because the satellites’ power output was limited to 10 to 15 watts (compared to the 120 watts of the USSB and DirecTV satellite), early satellite reception required dishes ranging up to eight feet in diameter, for a cost of some $2,000 per dish. In the late 1980s, broadcasters began scrambling their transmissions and began selling subscription-based decoders to unscramble the signals. By the mid-1990s, an estimated 4.5 million households were receiving these satellite transmissions; about half of that installed base were subscribers, paying an average of $25 per month for the full range of cable television and other broadcasting services. An unknown number of satellite dish owners either contented themselves with only still-unscrambled transmissions or had outfitted themselves with decoders capable of pirating the scrambled transmissions.

Meanwhile, the cable television revolution took off firmly during the 1980s. The rise of cable—and the rush of investors to that industry—quickly eclipsed the proposed DBS system. Hubbard’s USSB was greeted with skepticism from the cable and television broadcasting industry and, more importantly, from the investment community. In 1984, however, USSB appeared to be underway. Hubbard announced an agreement with RCA Astro-Electronics for the purchase of two direct broadcast satellites. The satellites, which were each to carry 240-watt amplifiers, would supply six channels of USSB programming. With a cost projected at $160 million, USSB’s satellites would join the two satellites already contracted for by Comsat’s Satellite Television Corp. Launch of the USSB satellites was projected for 1988. At the same time, Hubbard formed Conus Communications as a satellite-based news gathering service, which evolved into a 24-hour news network by the end of the decade.

The evolution of USSB, however, stalled through the 1980s. Raising investment capital proved difficult, with investors becoming wary after the failure of the Comsat and other satellite ventures, and it was not until 1990, with an investment by Chicago-based Pittway Corp., that USSB had procured the funding necessary to move forward. Other investors included Burt Harris, a Los Angeles-based cable operator and television broadcaster, and Nationwide Mutual Insurance and that company’s broadcast subsidiary Nationwide Communications. The Hubbard family continued to hold the largest investment—as much as 60 percent—in USSB. By then, Hubbard, who had already spent as much as $20 million through USSB, planned to launch a five-transponder satellite. With newly developing digital compression technologies, the five transponders would be capable of transmitting as many as 20 channels of programming. The USSB satellite would join another proposed satellite, a 27-transponder system being developed in a partnership among Hughes Communications, NBC, Cablevision Systems, and News Corp. as Sky Cable.

The Sky Cable partnership never took off and was scuttled in early 1991. The high-power DBS technology itself seemed dead in the water. Broadcasters began looking toward other satellite technologies, such as the medium-power direct-to-home service being developed as PrimeStar by a consortium of cable operators. But in June 1991, USSB and Hughes Communications agreed to join together to build and launch a 16-transponder DBS satellite. Terms of the deal called for USSB to pay Hughes $50 million upfront and another $50 million in installments, for ownership of five of the satellite’s transponders. The proposed satellite would broadcast at 120 watts, allowing households to receive the signal via small, windowsill-sized satellite dishes, initially projected to cost some $300 for the dish and receiver. Hughes would pick up the remaining $200 million of the estimated cost of $300 million to build two satellites and to launch at least one by 1994.

The Hughes-USSB deal established a common digital broadcast standard and revived DBS as a home entertainment technology. DBS quickly took steps to become a viable system. While Hughes began work on manufacturing the satellite itself, in 1992 USSB and Hughes reached an agreement with RCA/ Thomson Consumer Electronics, Inc. to design the DBS satellite dish and receiver distribution system to be used by the Hughes-USSB satellite. That system, dubbed Digital Satellite System, or DSS, was established in the same year.

Hubbard’s vision was at last coming to fruition. And that vision itself had expanded. With the Hughes-USSB satellite offering a proposed capacity of 120 channels, the DSS launch was seen as the world’s first “broadcast supermarket.” While DBS’s initial consumer base was considered rural households that had been passed by cable television, Hubbard and others in the industry began envisaging the emergence of niche programming services. Because the DBS satellite’s transmission could be received throughout the North American market with no degradation of signal quality, the potential arose for offering magazine-style stations, targeted at specific consumer interest groups. Niche programming remained financially unfeasible for the largely locally based cable television operators. But DBS’s reach would be more universal. As Hubbard told Success: ’ ’Let’s say we put on a program that appeals to 1 percent of the population. That’s a million homes.” DBS offered another advantage over cable. While DBS’s launch had long been slowed by the capital intensive nature of its startup, expanding its customer base presented none of the costly cable-laying and trench-digging of the cable industry.

With the launch of the Hughes-USSB satellite slated for the end of 1993, the two companies—Hughes formed the DirecTV subsidiary to provide its DSB service—began negotiating for programming. Technically competitors, the two companies remained intertwined, sharing the same satellite and position. DirecTV, with a capacity of some 200 channels compared to USSB’s potential 25, was seen as having the edge. However, in June 1993, USSB scored a coup when it reached agreements with both Time Warner, owner of HBO, and Viacom, owner of Showtime, for exclusive satellite broadcasting rights to these companies’ movie channels. USSB had beaten out Hughes by promising to accept the two movie broadcasters’ full multichannel offerings. In HBO’s case, this meant eight channels of HBO and Cinemax. Viacom would provide its Showtime, Flix, and the Move Channel, as well as MTV, VH1, and Nickelodeon/ Nick at Nite. In addition, USSB lined up Comedy Central, Lifetime, as well as its jointly owned All News Network. Meanwhile, with DirecTV focusing on pay-per-view programming, sports coverage—including exclusive deals with the National Football League and the National Basketball Association—and cable television networks such as the Disney Channel, the two companies developed complementary, rather than competing, programming packages. With the companies broadcasting from the same satellite and using a common technology, potential customers could be encouraged to subscribe to both satellite services.

DBS-1, the first high-power DBS satellite in the United States, was launched in November 1993. Satellite transmission was originally set to begin in April 1994. Hubbard, with much of USSB’s programming already set, went in search of funding needed to complete the new station’s launch—an additional $50 million earmarked for construction of USSB’s National Broadcast Center command center, a $12 million, 20,500-square-foot facility, and another $20 to $40 million for marketing and promotion of the USSB service. By April 1994, however, Hubbard had raised some $140 million in equity investment—including $20 million from Microsoft cofounder Paul Allen, $42 million from George Soros, and $25 million from Dow Jones. The Hubbard’s $50 million startup investment continued to give the family 60 percent control of USSB.

By May 1994, the company was at last ready to begin transmitting. The roll-out of the satellite dish and receiver packages—which included a free initial month of the full USSB program package—began in Albuquerque, New Mexico; Shreveport, Louisiana; Tulsa, Oklahoma; Jackson, Mississippi; and Little Rock, Arkansas, all cities with low cable television penetration. Rollout to other states continued through the summer, with the DSS satellite package, initially priced at $700, available in most of the country by the autumn of 1994. By the end of that year, Thomson announced that it had shipped more than 300,000 DSS systems. That number has climbed to one million by mid-1995. USSB’s subscriber base had by then reached 320,000, providing revenues of $42.3 million. The company, which had posted losses in 1993 and 1994, continued to lose money—some $74 million in 1995.

Nonetheless, the announcement of the company’s initial public offering for the beginning of 1996 was greeted enthusiastically by the investment community. The DBS industry itself was picking up, adding a new service, EchoStar, in December 1995, and additional manufacturers, including Sony, GE, and ProScan, of DSS satellite dishes and receivers. Meanwhile, AT&T paid $137.5 million to purchase 2.5 percent of DirecTV, adding the long-distance company’s massive marketing strength and its 90 million customer base to the future potential of DBS. Other companies, including MCI and News Corp., were preparing their own satellite television entries. USSB’s IPO had been expected to raise about $174 million for the company; instead the stock offering, made on February 2,1996, generated $224 million.

Through 1996, USSB continued to add customers, reaching 800,000 by its fiscal year end, with another 400,000 potential customers engaged in the initial free month trial. USSB’s revenues gained strongly over the previous year, nearing $192 million. Its losses continued to mount, however, dipping to $95 million for the year. Yet, these losses were expected to fade, as forecasts called for USSB to reach its break-even point of 1.6 million subscribers, an event expected to occur in 1997.