DirecTV Is Outpacing Dish. And Now Comes Malone.5/16/2008 8:00 PM Eastern
Liberty Media chairman John Malone and Dish Network chairman Charlie Ergen are two of the most mercurial executives in the pay TV industry.
Now, the two mavericks are determining the futures of DirecTV and Dish Network, the two satellite providers, with roughly 31 million subscribers between them.
Yet, as Malone and Ergen begin to hit heads, the companies they run have diverged, with one handily beating the other in gaining customers.
DirecTV, the nation’s second-largest pay TV provider with 17 million subscribers, is basking in strong subscriber growth. DirecTV gained 275,000 subscribers in the first quarter, an increase of 17%. Its winning formula has been: Focusing on upscale customers; growing its lineup of national HD channels, now at 95; and aggressive marketing.
There was no such luck for Dish Network. The third-largest pay TV service said it has been hit hard by having fewer HD channels, the sour economy, increased customer turnover, growing telco competition, customer-service problems and piracy.
The good news was that Dish Network saw its net income climb 65%, to $259 million, in the first quarter. But Dish only gained 35,000 subscribers, an 88.7% plunge from its pace of a year ago. It now has 13.8 million subscribers.
“With two satellite companies, we should be getting half the business [subscribers], if we’re a company that’s executing properly,” Ergen said during a first-quarter conference call last week. “And we didn’t come close to getting half the business. We got a very small percentage of the business. We’re not operating as well as we should have.”
With that dynamic in play, during the remainder of the year Malone, a veteran cable operator, and Ergen, a satellite pioneer, have quite different decisions to make and challenges to face.
Malone’s Liberty Media, after completing an $11 billion swap for News Corp.’s 41% stake in DirecTV in February, will likely decide if it wants to buy the rest of the nation’s No. 1 satellite provider, according to analysts.
Full ownership of DirecTV would permit Liberty Media to include the satellite provider’s sizable cash flow, $617 million in the first quarter, in its own financial results.
Liberty Media would then control and have the latitude to fully mine synergies between DirecTV, a giant distributor, and Liberty’s programming assets, which include full ownership or stakes in Starz Entertainment, QVC, GSN and three regional sports networks.
For example, DirecTV could use its clout as a major distributor to leverage better deals for Liberty programming services from cable operators — such as Comcast or Time Warner — which own or have ties to cable networks that are carried on DirecTV.
Right now, Ergen’s Dish Network has a variety of issues on its plate. In an effort to beat back the competition, Dish said it will continue to ramp up its HDTV lineup, offering 100 high-definition networks and local service to 100 markets by year-end, despite the failure of a satellite launch earlier this year that would have enhanced Dish’s HD capacity.
Dish now has an estimated 80 HD channels nationally and local HD in 55 markets.
“Now, they [DirecTV] have the momentum, and they’ve certainly got brand awareness for HD, but we’ll have a competitive product out there,” Ergen said.
Nonetheless, Sanford C. Bernstein & Co. analyst Craig Moffett last week hammered Dish on its subscriber-growth plummet.
“Dish would appear to be between a rock and a hard place,” he wrote. “At the low end, Dish’s 'everyday-low-price’ value proposition suddenly appears vulnerable against cable’s economically advantaged triple play. At the high end, Dish has been outflanked by DirecTV’s 'best HDTV’ positioning. Churn is eroding the base.”
LIKES HIS CARDS
But Ergen, a former professional poker player, was upbeat and said Dish Network has taken steps to address the problems, like call-center snafus and mishandled installs, that dragged down its customer growth.
“I learned when I played poker I’d better be patient,” Ergen told analysts. “And I played poker some nights where I folded for 10 hours in a row, and I walked out a big winner when the game was over an hour later. So we bet when we have cards and we’re patient when we don’t. We think that things are going to be better for us. We think we’re doing a lot of the right things.”
While DirecTV has focused on the customer’s video experience — by touting its DVRs, HDTV, original content and unique interactive options — Dish Network is trying to expand into new businesses, namely selling set-tops to cable operators and pursuing mobile-video opportunities.
At the start of this year, Ergen split his fiefdom and is now chairman of two separate publicly traded companies: Dish Network, his pay TV service; and EchoStar Corp., which houses his set-top and fixed satellite businesses, as well as video-viewing place-shifter Sling Media.
EchoStar, which supplies Dish Network with its set-tops, will be selling Sling-enabled modems and set-tops to the cable industry. The new SlingModem will allow cable customers to “place-shift” programming from their TV sets for viewing on any Internet-connected device.
To make its pitch to cable operators, EchoStar for the first time ever will be an exhibitor at The Cable Show in New Orleans this week.
Ergen is also aggressively pursuing a strategy of being able to offer consumers portable and mobile video, via the acquisitions of not only Sling Media but 700-Megahertz wireless-spectrum licenses obtained earlier this year, which he may use to launch a mobile TV service.
“It remains to be seen whether 700 MHz or Sling or our satellites — or anything we’re doing — we can piece together to make money at, but we think the odds are in our favor,” Ergen said last week.
In the spectrum auction, Dish Network shelled out $712 million in a winning bid for 168 licenses in March, and it paid $380 million for Sling Media last fall.
Last week, Dish Network vice chairman Carl Vogel said the company is looking for partners interested in possibly creating a mobile-video service.
“In terms of 700 MHz, this acquisition of spectrum dovetails with our broader philosophy that we want to be the best we can at video,” Vogel said. “Our principal interest in this is to provide some mobility and portability options that dovetail nicely with both our Dish customer base, as well as our Sling product.”
But he and Ergen repeatedly cautioned that Dish Network is just testing the waters — and will literally test the technology, and then try to determine if mobile video can be profitable — before it forges forward.
“Nobody’s made money in the mobile business today that I know of,” Ergen said, adding that Dish Network will do several tests, including one of European mobile-TV broadcast technology with Alcatel-Lucent equipment in Atlanta.
HARD TO HANDICAP
Over the years, Wall Street analysts have written many a report trying to forecast what Malone and Ergen will do, short-term and long-term — not an easy handicap.
For example, few would have seen Malone — a cable icon who made Tele-Communications Inc. into an industry giant before selling it to AT&T in 1999 — buying into a direct-broadcast satellite provider, cable’s archrival. And Dish Network’s bid for the spectrum, as well as its purchase of Slingbox-maker Sling Media, were unforeseen.
When the News Corp.-Liberty deal was announced in December 2006, some analysts predicted that Malone planned to “flip” DirecTV to a telco — or that he would try to strike a deal to merge it with Dish Network.
That’s not the talk on Wall Street now. Instead, the speculation is about how Liberty Media will ultimately incorporate and leverage DirecTV into its portfolio of programming assets.
Earlier this month, to enable DirecTV to do a $3 billion stock buyback, Liberty Media agreed to keep its voting stake in the satellite company at its present 47.9%, even though Liberty’s actual holdings will increase — to an expected 53% — once the buyback is done.
Since it completed its deal for News Corp.’s 16.3% stake in DirecTV, Liberty Media has already increased its ownership from 41% to its present 47.9%.
“We like the company so much more, that post the swap we’ve added another 78.3 million shares to our holdings,” Liberty Media president Greg Maffei said during the company’s first-quarter conference call earlier this month.
GIVE ME LIBERTY
On both Liberty Media and DirecTV’s recent first-quarter earnings calls, executives said they are still trying to find ways to capitalize on their companies’ relationship.
DirecTV CEO Chase Carey cited Liberty Media’s amenability to holding its voting stake at 47.9%.
“Liberty and DirecTV are working well together, and working well to move DirecTV forward,” Carey said. “Clearly, we and Liberty believe there are other steps that make sense for us together and expect to continue to move forward expeditiously as we work through short-term items.”
On Liberty Media’s call, referring to DirecTV, Maffei said, “We’re still working on the best path to unlock additional value there.”
As for Liberty Media’s stake increasing as part of the stock buyback, he told analysts: “We’re also excited that our economic interest in the business will increase, if not our voting interest. And nothing they are doing, we believe, limits our future strategic options, or theirs.”
When asked about the option of merging DirecTV with Liberty, Maffei said, “It really depends on what kind of a merger you are thinking,” but added there was no such plan at present.
After Liberty Media agreed to hold its voting stake to 47.9%, Sanford Bernstein analyst Craig Moffett wrote, “That will quell hopeful speculation that Liberty will buy in all of DirecTV.”
But other analysts have come to the opposite conclusion of Moffett, and believe odds are good that Liberty Media will buy the rest of DirecTV.
“The new agreement … does not allow Liberty to acquire a larger voting stake without a formal tender offer for the all the remaining shares held by the company,” Citigroup analyst Jason Bazinet wrote. “We believe there is a 75% chance that Liberty Capital tenders for DirecTV within the next 12 months.”
NOT JUST CONTENT
Several Wall Street analysts believe that Malone bought into DirecTV not as a passive financial investment, but as an avenue to actively capitalize on having both a distribution platform and content company.
On DirecTV’s first-quarter call, Carey alluded to distributor-content benefits when asked if the satellite company would be interested in acquiring a network.
“My general view, they all seem to be premium-priced,” Carey said. “I’ve said it before, I think content and distribution — there are values, there are synergies and values — you can create. … We’d be selective and opportunistic.”
Janco Partners analyst April Horace said that long-term, it does not make sense to have separate “securities out there” for DirecTV and the Liberty Entertainment Group, the tracking stock that holds Liberty Media’s interest in DirecTV, Starz, GSN and the regional sports channels.
Horace said that she thinks Malone “wants to be very much strategically involved” in DirecTV, and Jamie Townsend, an analyst for JRPG Investment Research, also predicted that Malone and Liberty Media will not be mere passive investors.
“I guess almost by definition his role is going to be more active: How active that is, is much harder to say,” Townsend said. “Clearly, they’re going to have something to say about where the business goes, otherwise, they wouldn’t have made the investment they’ve made.”
Others believe it’s too soon to try to gauge Malone’s plans for DirecTV.
“It’s too early to opine on what he’s doing there,” said Jimmy Schaeffler, chairman of The Carmel Group, which has consulted for DirecTV and Dish Network.
But Schaeffler added, “When all is said and done, it fits what I know of Dr. Malone that he will become more deeply invested, or his companies will be more deeply invested, in DirecTV.”
Last summer Carey renewed his DirecTV contract until the end of 2010, but Schaeffler still believes that despite Carey’s success at the satellite provider, it’s inevitable that Malone will bring his own executive in, someone who understands the Liberty Media companies and how to make DirecTV fit in with them.
“He’s [Carey] a News Corp. guy; he doesn’t understand Liberty,” Schaeffler said.
DirecTV has made its gains, in large part, by positioning itself as a premiere programming provider, with a big emphasis on HDTV. It now has 95 national HD networks and local HD in 77 markets, and will have capacity for 150 HD networks and local HD in 100 markets by year-end.
Cable, on the other hand, has had its own triple play and video on demand to tout as a differentiator against satellite.
“That’s [HDTV] kind of a battle that’s been fought and we won,” DirecTV executive vice president of content strategy and development Derek Chang said.
“What we’ve always been about is highlighting our content overall,” Chang said. “We’ve created a premium brand for content. Customers know if they want the best content, they come to DirecTV.”
In terms of original content, Chang cited DirecTV striking a deal last month to partner with NBC on a third season of Friday Night Lights, which will initially air on DirecTV and then the Peacock Network.
Dish Network’s HDTV offerings, particularly in local markets, are lagging behind DirecTV.
Dish Network suffered a setback this year when a satellite, AMC-14, it was going to use to expand its HD offerings failed to reach its orbit and was declared a total loss.
Dish Network has downplayed the impact, saying its HDTV plans are still on target.
But on the first-quarter call, Ergen conceded that the AMC-14 problems had forced Dish Network “to rejigger an awful lot of stuff, to move things around,” in order to launch its latest round of national HD networks, which include Sci Fi HD and Bravo HD.
“But we were able to do that, so we have a very competitive HD offering in the marketplace,” said Ergen, who then promptly dropped 15 Voom networks, bringing his HD channel count back down.
A number of analysts believe that long term, the AMC-14 malfunction will slow down some of Dish’s HDTV plans.
“We expect DirecTV to continue to show good growth, recognizing some of the economic crosswinds that are out there affecting everybody,” Townsend said. “We’re less comfortable that Dish may be able to reverse their recent trends, partially because their HD offering continues to fall short of what DTV has, and they also failed with the satellite launch that took place in March.”
BUYER — OR SELLER
Some analysts also believe Ergen will continue to look for acquisitions like Sling Media. Last year EchoStar was an unsuccessful bidder for Intelsat, the world’s largest fixed satellite provider; it reportedly unsuccessfully bid for Ion Media Networks; and was approached by MySpace co-founder Brad Greenspan about jointly bidding for Dow Jones & Co.
EchoStar could be a seller. The long-speculated AT&T acquisition of Dish Network is still possible, some say.
“It certainly makes some sense, and we continue to think it’s a possibility,” Townsend said.
But Schaeffler just doesn’t see Ergen, who he said is still passionate about the business, selling this year.
“He’s a young man,” Schaeffler said. “He’s in his mid-50s. He loves what he does. He’s got children coming up. … Charlie eats, sleeps and breathes this stuff.”