The move could also paint EchoStar into a corner if the merger doesn't get approved.
As of mid-April, EchoStar will stop accepting new customers for its Internet access service via satellite, a business done in joint venture with McLean, Va.-based StarBand Communications and Israel's Gilat Satellite Networks. The money-losing venture has managed to attract only 40,000 U.S. subscribers.
The announcement is seen by many industry watchers as a tactic by EchoStar Chairman Charlie Ergen to pressure the Federal Communications Commission into approving its Hughes Electronics, which offers a similar satellite-based service, Direcway.merger with
"Charlie's trying to convince them that if he doesn't get what he wants, there won't be satellite Internet access," said John Stone, an analyst covering EchoStar for investment bank Ladenburg Thalmann.
EchoStar, based in Littleton, Colo., said it is stepping out of the venture because offering the Internet access service was not a sound business.
"The wholesale model EchoStar was utilizing with StarBand was not economical, and we didn't see a clear plan to make it economical without substantial changes to our business model," said EchoStar spokeswoman Judianne Atencio.
"We believe the pending merger would be the best way to deliver satellite broadband," Atencio said. Without it, EchoStar just doesn't have an "economy of scale," she explained.
If satellite Internet access isn't offered, most of rural America would be without a broadband option, Stone said.
"Twenty percent of households in the rural U.S. would not be able to have DSL or cable for the foreseeable future," he said. "And rural America is where congressmen and senators come from, so Ergen can bet his move will hit close to home with elected officials."
A representative from the FCC said the agency couldn't comment, as the merger was still under review.
"It's transparent that this is a move for holding rural high-speed services hostage to the bigger deal," said another source close to EchoStar, speaking on the condition of anonymity.
StarBand will still be able to sell its services and equipment directly to dealers, Atencio said, and service for current customers should continue as usual. EchoStar will also continue to have an investment in StarBand, which was written down to $36 million as of the end of 2001.
But EchoStar could be creating a problem for itself. "If they don't merge, (Ergen) is going to have to backpedal to get back into the market," Stone, said, "and StarBand may not like being played around."
StarBand President David Trachtenberg said he would "welcome an ongoing relationship with the company." However, since StarBand is selling directly to retailers and installers, such as Dish Network, going back to EchoStar may not be "what works best," he said.
Broadband access via satellite is expensive; EchoStar's service goes for around $70 a month, and that's not including the purchase of a $700-plus satellite dish needed to start service. With DSL (digital subscriber line) service costing around $50 a month, subscribers aren't likely to opt for satellite unless they're in a rural area that can't get DSL or cable-modem Internet access.
Stone speculated that StarBand could have trouble staying in business without EchoStar, since about 90 percent of its subscribers came through EchoStar. But Trachtenberg said the company is already seeing strong momentum through its "Dealer Direct" program, launched Thursday.