News

DirecTV Sub News Roils DBS Stocks

10/08/2000 8:00 PM Eastern

Hughes Electronics Corp. last week reported that its DirecTV Inc. direct-broadcast satellite service added 450,000 new high-power subscribers in the third quarter, less than Wall Street analysts had expected.

As a result, shares of Hughes stock dropped significantly in extremely heavy trading last Thursday, down as much as 8 percent at times. Some Wall Street analysts had expected third-quarter subscriber numbers as high as 500,000.

Hughes' share price started to fall earlier in the week on rumors that figure wouldn't be met.

The company, which now boasts 9 million subscribers, plans to release its third-quarter earnings figures Wednesday (Oct. 11). Quarterly revenues are projected to range from $1,650 million to $1,700 million, the company said in a press release.

DirecTV's churn was higher than usual in the third quarter, and driven in part by a first-time price increase on monthly programming packages, Hughes Consumer Sector senior vice president Eddy Hartenstein said in the statement.

In the third quarter, DirecTV increased the price its existing customers pay for its monthly packages by $2. It had earlier raised programming prices for new subscribers.

DirecTV spokesman Bob Marsocci could not say how high churn had spiked in the third quarter. In the second quarter, the company had successfully kept its churn in line with its goal of 1.5 percent per month.

PaineWebber Inc. cable and satellite analyst Tom Eagan said the lower cost of DBS hardware in recent years has helped to draw new, budget-conscious subscribers more likely to drop service when prices are raised.

"There are people angered by the two-dollar price increase," Eagan said. "Cable sees four percent rate increases every year, but DirecTV hadn't seen a price increase in years."

As long as DirecTV's subscriber churn is back in check by the time fourth quarter numbers are reported, Eagan added, the revenues from the price increase should more than offset any losses.

But Eagan also suggested that the recent churn increase was driven as much by increased competition from cable operators as by rate hikes.

Cable systems have been more aggressive in deploying and marketing digital cable in recent months. And most top MSOs are now offering-at least on a trial basis-cash payments or long-term programming discounts to DBS customers who switch back to cable.

For example, Comcast Corp. is testing a dish buy-back program with a payout of $100 to $300, said Comcast Cable Communications executive vice president of marketing and customer service Dave Watson. The program is most successful when Comcast representatives make the offer in person, Watson added.

Stock prices for DBS companies EchoStar Communications Corp. and Pegasus Communications were also hit Thursday, following the DirecTV subscriber report.

"The Street is looking for a crack in the DBS fundamentals," Eagan said, adding that Pegasus and Dish stocks were hit harder last Thursday than Hughes was.

By Friday morning, Hughes stock had begun to bounce back, while EchoStar and Pegasus continued to slide.

Hughes may have been somewhat protected by widely published reports that its parent, General Motors Corp., may sell the company.

DirecTV ended the third quarter about 1 million subscribers short of its year-end goal of 10 million customers. Eagan predicted the company would come close to that target by the end of the year. But he didn't expect Hughes stock to take a huge hit if it doesn't pass 10 million.

"Any restructuring in the works won't be materially affected by a fourth-quarter number," Eagan said.

EchoStar does not plan to release its third-quarter subscriber numbers until next month, a company spokesman said last week.

Pegasus plans to report its subscriber numbers after the market closes on Nov. 8, and will hold an analysts' call the following morning, a spokeswoman said.

Despite Wall Street's reaction, Marsocci quickly pointed out that DirecTV is "still having a record year over prior years, and we're pretty confident we'll be in the 9.7 million to 10 million subscriber range at year-end."

To help meet its goal, DirecTV plans in mid-October to introduce a new subscriber acquisition campaign that offers free installation. The offer, which will run through the holidays, will be available through national retailers such as Blockbuster Video, RadioShack Corp., Best Buy and Circuit City.

DirecTV will also redirect the focus of its Home Services Network-which, for the past year and a half, had converted former PrimeStar by DirecTV subscribers to the company's high-power service-toward the free installations.

"For the first time in its history, DirecTV is entering the fourth quarter with the equipment and installation capacity needed to meet the traditionally strong year-end holiday demand," Hartenstein said in the release.

DirecTV saw a net gain of 550,000 subscribers in the fourth quarter of last year, Marsocci said. That's without DirecTV's current equipment and installation capacity and before Blockbuster came on board.

Some of DirecTV's planned interactive-TV deployments may also prove helpful this holiday season. Late last week, DirecTV and TiVo Inc. announced the launch of their integrated set-top box at California-based Good Guys consumer electronic stores.

The service included a new TiVo feature called Trick Play, which provides sports fans with access to instant replay in normal speed or slow motion.

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