AT&T to stop selling DirecTV service

By Sinead Carew

NEW YORK (Reuters) - AT&T Inc (T.N) said on Tuesday it will stop selling satellite television services from DirecTV Group Inc (DTV.O) in the first quarter in a sign the phone company may favor EchoStar Communications Corp (DISH.O) as its sole satellite partner.

Still, AT&T Chief Financial Officer Rick Lindner told Reuters separately that the company has not made a final decision on the matter and could take until the second half of 2008 to decide.

AT&T has a marketing partnership with EchoStar in some markets and with DirecTV in others, and the phone company is also expanding its own video service called U-verse, which is delivered over high-speed fiber optic cables.

The company said it would stop offering DirecTV's services to phone customers in the first quarter, while its current agreement with EchoStar extends until the end of 2008.

DirecTV had no immediate comment, and EchoStar could not be reached immediately.

Bernstein analyst Craig Moffett said it was likely that EchoStar would be AT&T's sole partner.

"It would be awfully difficult at the end of 2008 to suddenly reverse course," said Moffett, adding that a reversal to DirecTV would give training and billing headaches to AT&T staff.

DirecTV shares closed down 79 cents, or 3.3 percent, at $23.54 on Nasdaq, where EchoStar finished off $1.25, or 3 percent, at $38.83.

Many analysts had expected AT&T to chose EchoStar over DirecTV -- the satellite partner of BellSouth, which AT&T bought late last year -- because the phone company has a more involved technology relationship with EchoStar.

But Lehman Bros analyst Vijay Jayant said in a research note that Tuesday's news could be a slight positive for DirecTV since the phone company is postponing making a decision until late 2008, compared to expectations of a decision this year.

Jayant estimated that DirecTV depends on AT&T for up to 9 percent of its gross subscriber additions, while EchoStar depends on AT&T for 16 percent of its gross additions.

Moffett pegged the DirecTV dependency on AT&T at above 10 percent and said that it would likely see a drop-off in subscriber growth as a result of the AT&T move.

"It could certainly dent (DirecTV's) subscriber growth costing them a distribution partner. Alternatively, they could throw money at the region and try to sustain growth," Moffett said. "That comes at a cost."

AT&T's Lindner said the company has yet to decide if it will have one or two satellite partners, but that it favored an eventual partnership with just one. He said AT&T is in talks with both companies.

"We want to make sure we have the best long-term answer to our customers and the best economics from the commercial agreement that fairly represents the distribution channel," Lindner said.