Cable Operators

Packaging Power Shifts

3/13/2005 7:00 PM Eastern

The marketing marriages between direct-broadcast satellite providers and telephone companies are starting to take on new dimensions, now that MSOs like Cablevision Systems Corp. and Time Warner Cable have begun aggressively marketing bundled packages of phone, high-speed data and video service.

“We have a very common motivation for cable not to have a connection with the home. The interests have been extremely well aligned,” says DirecTV Inc. executive vice president of sales, distribution and business development Steve Cox, referring to marketing deals with Verizon Communications Inc., BellSouth Corp., Qwest Communications International Inc. and Cincinnati Bell Inc. to pitch DirecTV’s programming service to telephone customers. DirecTV has agreements with all major telephone companies excluding SBC Communications Inc., which has a deal with EchoStar Communications Corp. to market Dish Network programming to its customers.

For EchoStar and DirecTV, the idea of teaming up with local telcos to combat cable isn’t a new strategy. DirecTV cut a marketing and distribution deal with Verizon predecessor Bell Atlantic in 1998.

NEW MARKETING MUSCLE

But DirecTV, EchoStar and their telephone company partners have bulked up the marketing muscle behind the bundled product offerings, which offer consumers discounts based on the number of products they order from both the satellite companies and the telcos.

And the companies are also moving to enhance the bundles by offering subscribers the ability to receive a single bill for DirecTV video, digital subscriber line Internet access and phone service. DirecTV and Verizon began offering customers a single bill for all three products in February — six years into the relationship. And Qwest chairman Dick Notebaert told analysts last month that the company would soon offer customers a single bill for DirecTV video and Qwest telephone and DSL service.

But as Verizon and SBC complete construction this year of networks that will allow the telcos to offer fiber-delivered video service without the need for a satellite dish, the telco-DBS alliances are likely to change, or perhaps fade away. But certainly not immediately.

DirecTV’s Cox says his company’s agreement with Verizon prevents the telco from specifically targeting customers that subscribe to the DirecTV-Verizon bundle with offers for Verizon’s upcoming FiOS Television service, but that the agreement won’t stop Verizon from pitching its new video service to wide market areas.

“I’m sure there will be [Verizon] customers who will be very content with their DirecTV service — and will see the difference in what we’re providing — that will choose to stay with DirecTV. And from Verizon’s standpoint, that’s still a win for them, because it keeps cable out of the house,” Cox added.

EchoStar chairman Charlie Ergen acknowledged in January that the company may have to rework its distribution agreement with SBC, as the telco expands into fiber-delivered service. And while Ergen noted that EchoStar would compete with SBC for video subscribers, he stressed that cable operators face more risk from telco competition than the satellite companies do.

“If the cable companies get weaker from the telco competition and they can’t pay their debt back, it makes it better for us in the long run,” Ergen added.

The Carmel Group analyst Jimmy Schaeffler says he expects that SBC and Verizon will stop marketing the DBS bundles after the companies roll out their fiber-delivered video products. But he says the telcos may maintain their relationships with DirecTV and EchoStar to offer bundled video service to customers in smaller markets that aren’t upgraded with fiber-to-the home networks.

“In today’s competitive environment it makes less and less sense for a [telephone] company that can deliver a triple or quadruple play, all on a single bill, to stick with a DBS provider,” Schaeffler says.

But certainly in the near-term, it does. As SBC’s executive vice president of programming, Dan York, explains: “What’s interesting is we have 35 million households in our footprint that we’re serving. But initially we’re building [video service out] to 18 million. Dish offers a solution for the others.”

He notes, “We’re the No. 1 source of subscribers for Dish, and we became that very soon after starting to sell the service.”

EchoStar and DirecTV won’t disclose the number of subscribers they have gained through marketing and distribution deals with telephone companies. But BellSouth announced in February that more than 200,000 of its customers had ordered the DirecTV bundle since the companies began marketing the package, which offers $10 in monthly bundle discounts, in August.

DirecTV offers Verizon customers monthly discounts of $6 on its programming packages. Verizon also offers an additional $5 discount on the telephone portion of the bill to customers that buy a Freedom Unlimited calling package with DirecTV video and Verizon DSL service.

ADDING WIRELESS TO BUNDLES

Comcast Corp., Time Warner and other operators have reportedly considered buying a wireless phone company, or striking an agreement with a provider that would allow the MSOs to add cellular phone service to their product bundles.

Telcos such as Verizon, which already market established wireless phone services, may have an advantage over cable operators when it comes to adding wireless phone service to the bundled mix.

Mitch Stern, who resigned his post as DirecTV president last week, said in January that the top DBS provider would consider partnering with telcos to offer DirecTV customers bundled wireless phone service.

“I think wireless is increasingly becoming a part of the bundle,” Cox says. “I think you’ll see us more active in that [wireless] area, down the road.”

Cox says DirecTV hasn’t marketed its bundled offers with Verizon, Quest, BellSouth and Cincinnati Bell, leaving it up to the telcos to pitch DirecTV to their customers. But he said DirecTV is beginning to work with the telcos on joint marketing efforts which emphasize bundled high-speed data, telephone and DirecTV video bundles.

“You’ll see us more aggressively in 2005 talking to our customer about the benefits of having DSL in the home, but not the same breadth of the bundle that’s being marketed directly by the telcos,” Cox says.

September