AT&T TO REACH OUT TO TV\Firm will buy stake in satellite broadcast service.

Byline: Mark Landler The New York Times

Posing perhaps the most formidable challenge yet to the cable television industry, AT&T plans to invest in the nation's leading satellite broadcasting service and to market its programming to a vast audience that includes 90 million telephone customers.

AT&T said Monday that it would pay $137.5 million for a 2.5 percent stake in the service, DirecTV, which competes with cable by beaming 175 channels of television programming from orbiting satellites to household dishes the size of pizza pans.

DirecTV has 1.2 million subscribers. But analysts said that by throwing its brand name and marketing muscle behind DirecTV, AT&T could transform the company from a peripheral player into a mainstream rival for the cable industry.

For AT&T, the deal represents the company's first foray into television in its 111-year history, and its first strategic move since it announced plans last year to split itself into three separate companies: communications services, equipment manufacturing and computers.

"What we've done in one fell swoop is to establish ourselves with a national presence in entertainment," said Joseph P. Nacchio, the executive vice president of AT&T's consumer and small-business division.

Suddenly, satellite television has become the media industry's latest gold rush. Wednesday, the Federal Communications Commission plans to auction off the one remaining slot for a direct-broadcast satellite, and AT&T's long-distance rival, MCI Communications, said it would be an aggressive bidder, along with the giant cable operator, Tele-Communications Inc.

Based on AT&T's price for a 2.5 percent stake in DirecTV - which would translate into a $5.5 billion valuation for the entire company - Wednesday's auction could rapidly escalate beyond the $175 million level at which MCI has said it would open the bidding.

Nacchio said the company planned to promote AT&T much as it promotes long-distance telephone service. Consumers who buy telephone and DirecTV service from AT&T will be billed on the same statement. And AT&T will offer financing for the 18-inch satellite dish, which costs $700, through the AT&T Universal card.

For all of AT&T's prowess, though, satellite broadcasting still has some critical limitations as a television medium. Unlike cable, it cannot carry local broadcast stations. To receive those channels, viewers must install a traditional rooftop antenna.

Moreover, the steep price of the dish, plus the monthly cost for the service, has put off some consumers. DirecTV's monthly rates range from $5.95 for a bare-bones package to $44.95 for a full array of channels. Customers must pay extra for movies or packages of sports programming.

In addition, while cable and local-phone companies foresee a future of two-way, or "interactive," services, the home satellite systems like those used by DirecTV are designed for simply receiving information.

Still, Monday's announcement galvanized this fledgling industry. Until now, direct-broadcast satellite technology has drawn interest mostly from satellite manufacturers and cable companies seeking to plug gaps in their service areas.

DirecTV is owned by Hughes Electronics, a subsidiary of General Motors Corp., while the company's archrival - Prime Star Partners, which has a million subscribers - is owned by a consortium of cable operators, including Tele-Communications.

"AT&T's entry is going to make this industry fly a lot faster than it would have otherwise," said John Aronsohn, a senior analyst at the Yankee Group, a communications research firm in Boston.

Aronsohn estimated that direct-broadcast satellite would have 10.5 million subscribers by the year 2000. Many of those are expected to come at the expense of the cable industry, which has 62.2 million subscribers out of a total of 95.3 million television households.