The Dish Cable Loves to Hate1/23/2005 7:00 PM Eastern
Cable operators might not like it, but Charlie Ergen and his EchoStar Communications Corp. exemplify a true American success story that people just love to root for. The folksy, down-home manner and casual dress style of EchoStar’s chairman and CEO appeals to millions of Americans who yearn for a personal touch in a world where multinational corporations dominate.
Never mind that EchoStar has a current market capitalization of more than $14 billion or that the company has about 20,000 employees. People just love to watch Ergen and executive vice president Jim DeFranco engage in straight talk about issues that affect EchoStar, their customers and the direct-broadcast satellite industry every month during their satellite-delivered “Charlie Chat” sessions.
|EchoStar at a Glance|
|For first nine months, ended Sept. 30|
|Subscribers||10.5 million||9.1 million|
|Revenue||$5.2 billion||$4.2 billion|
|Total Sub Acquisition Costs||$1.158 billion||$940.4 million|
|Net Income||$144.7 million||$222.8 million|
|Source: EchoStar Communications Corp.|
In just 14 years, EchoStar has become the country’s third-largest multichannel video distributor serving more than 10 million customers — and it’s done it all organically. Where MSOs like Comcast Corp. and Time Warner Cable have added customers through a series of acquisitions, EchoStar has grown by adding one customer at a time.
Yet some cracks are beginning to appear in the foundation of EchoStar’s business. While the company’s top executives refused to be interviewed for this report, despite numerous requests, observers who track the company tick off several reasons to look for chinks in the armor of EchoStar’s Dish Network.
|In the Beginning|
|The Early Days of EchoStar Communications Corp.|
|1980 — Charlie Ergen, his wife Cantey, and his partner Jim DeFranco (left) begin selling C-band dishes in the South off the back of a flatbed truck.|
|1987 — Ergen’s EchoStar files for a DBS license with the FCC|
|1992 — EchoStar is granted orbital access|
|1995 — EchoStar establishes its Dish Network service and turns on its first customer|
They note that most cable operators have completed the upgrade of their plant to the tune of $85 billion. Bundled packages offering voice, video and data products are luring some customers back to cable and enticing others to stay with their existing provider. And telco partners are beginning to build an infrastructure that could enable them to bypass their satellite partners, including EchoStar.
Clearly, EchoStar has risen to a number of challenges with sometimes surprising results. While the company’s growth curve started out slowly, by the turn of the century it was starting to worry the cable business. Before they knew what was hitting them, cable operators — which had never really experienced any competition before — realized they were losing a significant number of customers to EchoStar and its DBS rival, DirecTV Inc.
In 2000, EchoStar served 4 million customers. By 2002, its customer base had increased to 7 million. Today, EchoStar serves 10.86 million customers. The company added about 350,000 customers in the third quarter last year, and some analysts expect the company’s growth to continue for some time. Legg Mason Wood Walker Inc. analyst Daniel Zito predicts EchoStar’s first-quarter net adds will be 390,000.
But some analysts predict a rougher road ahead for EchoStar. For instance, Credit Suisse First Boston LLC cut its rating on the company’s stock earlier this month to “neutral” from “outperform” and sliced its price target to $33 from $36, saying an increase in competition from DirecTV could negatively affect EchoStar’s results in the near future. Customer churn is already on the rise, as are acquisition costs — a formula that could hurt the company if it’s not careful, analysts warn.
“In general, EchoStar is doing well,” says Carmel Group CEO Jimmy Schaeffler. “Not great. But well. Wall Street is happy with their performance. They see good business decisions being made by the executive team over there, notably their partnership with SBC [Communications Inc.].” EchoStar’s deal with the nation’s largest telco, SBC, has allowed the company to bundle its Dish service with voice and data services.
EchoStar’s acquisition cost for new subscribers has steadily climbed through the years to its present level of around $600. That compares to an acquisition cost of about $250 for cable operators, but slightly beats DirecTV’s acquisition expenses. And because it beats DirecTV’s numbers, Wall Street investors and analysts are pleased.
EchoStar executives aren’t too worried about the lift in acquisition costs. After all, SBC is picking up a chunk of the acquisition costs for the customers it entices with bundled deals within its service territory, says spokesman Steve Caulk. What’s more, as EchoStar’s customers begin to lease more equipment, rather than buying it, “we know we will be able to reissue equipment that comes back to us,” he says.
“EchoStar has always been a good marketer of its service,” says Tom Watts, an analyst with SG Cowen. “The rate hikes are lower than what cable is offering. And they can get the digital subscriber line bundle with SBC as a partner. They continue to have the price advantage over cable, and they have the bandwidth to add services, which they are [doing] with their extensive ethnic-programming mix.”
Zito also remains somewhat bullish on EchoStar, but notes that challenges loom for the company. “We view the company as extremely well-managed and candid, which we like,” he says. “But cable operators have improved their product and service. They have better video on demand and more local high-def signals, which leads to a better video product near-term. We also expect the cable operators to become increasingly aggressive in pushing lower-price digital offerings into their basic-sub base and broaden the use of bundled discounts with accelerating telephony efforts.”
NEW GROWTH DYNAMIC
EchoStar’s growth should remain strong for a while, Zito says. But it won’t be as brawny as in years past. He predicts EchoStar will increase its gross new customer additions by 5% in 2005 as SBC continues to expand its rollout of Dish systems. But churn will also be higher, and Zito predicts the company’s net subscriber additions will slip to 1.3 million this year from 1.44 million in 2004 as the company faces more competition from DirecTV and cable.
Continued local-into-local launches — offering local broadcast signals in local markets — will help boost subscriber numbers. But it won’t provide the same increase it has in the past because only 4% of the country is not covered by local-into-local packages at this point. Moreover, Zito expects DirecTV to push its local initiatives heavier in 2005, which will eliminate the dominance EchoStar has enjoyed in many markets for the last couple of years.
Clearly, EchoStar’s partnership with SBC is bearing fruit. Not only is SBC sharing the installation and marketing costs, but the bundled package is reducing churn, Zito says. That’s important because churn rates for both DBS providers are on the rise. Indeed, EchoStar’s 2004 annualized churn rate was 19.4% and the number is expected to rise as DirecTV and cable operators become more aggressive with their marketing and pricing efforts.
But Ergen and his team aren’t standing still. The company is rolling out advanced equipment and services to compete more effectively with cable. EchoStar has stepped up its efforts to improve customer satisfaction and loyalty, analysts and dealers say. It’s also beginning to shy away from deeply discounted deals that increase churn when the promotions expire, says Leichtman Research Group CEO Bruce Leichtman.
“We’re seeing DirecTV do more 'Wow!’ deals now,” he says. “It’s something EchoStar used to do a lot of, but Charlie [Ergen] has figured out that he doesn’t have to do that. He’s becoming more prudent about which customers he’s going to go after and keep.”
Linda Prevado, co-owner of Castle Rock, Colo.-based Dish dealer World Satellite, says: “In the last two years, EchoStar has really stepped up its customer satisfaction programs.”
EchoStar is continuing its strategy of launching high-end equipment. Among the slew of new products this year is a new HD receiver and TV-set combo, as well as a souped-up digital video recorder designed to dull the cable industry’s edge with VOD. Indeed, the company is promoting the ability for customers to receive and download up to 200 hours of satellite-delivered programming each month with the new Dish-Player DVR 625. Ergen is even calling the service “video on demand,” a move some cable operators consider sacrilege.
EchoStar expects to roll the service out in March to customers with Dish Network’s new DVR. EchoStar will initially download about 30 movies a month to customers’ DVRs with plans to push the number to 100 movies. Popular satellite-delivered programming may also eventually be downloaded to customers’ boxes if they agree to provide Dish with information about their viewing habits, similar to the data TiVo Inc. customers provide for customized downloads, according to Michael Schwimmer, executive vice president of marketing and programming at the press conference announcing the deal earlier this month during the Consumer Electronic Show.
“Dish Player-DVR, with its advanced pause, reverse and fast-forwarding capabilities, offers a better VOD experience than any other satellite or cable TV product,” Schwimmer said.
FRIEND TURNING FOE?
Clearly, Dish could use more competitive advantages. Even its phone partner, SBC, could become troublesome in the future.
As DirecTV sets its sights on EchoStar’s subscriber base, SBC is poised to offer its own video product through its wired network, a move that could essentially negate the telco’s need for EchoStar’s video offering.
Of course, it will be a while before that happens. And telephone companies have been threatening to deliver video to their customers via wired networks for more than two decades with little or no success. Still, many analysts believe the telcos will step up their push for the delivery of video products because cable operators are finally going after the local phone business with voice over Internet protocol service.
At the CES press conference, Ergen admitted the telcos’ push into the video business could be a competitive factor.
“They’ll take video to another level, and they’ll probably be successful, some more than others,” he said. “We obviously think we can compete against them, and obviously we’ll have to wait and see how it all shakes out. Ultimately, you have to make a return for your investors, and you have to pay back your debt. The real risk of the telcos [delivering video service directly to consumers] is to cable. 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.”
Still, he admitted that he’ll have to be careful how he moves ahead with his telco partners. He promised any future deal with SBC would be good for both, saying he won’t do anything that would harm EchoStar. “We stay away from bad deals,” he said.
Many analysts think EchoStar is either going to have to expand or sell out. Some think the company will go after Voom, the fledgling DBS platform from Cablevision Systems Corp.
Clearly, EchoStar could use Voom’s satellite spectrum. Local HD station delivery, coupled with the addition of satellite-delivered networks delivered in an HD format, will further squeeze EchoStar’s bandwidth capabilities. Mark Jackson, president of the company’s engineering arm EchoStar Technologies Corp., says the company is always on the lookout for ways to gain capacity but declined to go into any detail. “EchoStar would explore any reasonable opportunity to gain the resources that would allow it to address customer demands,” he says. “Expansion efforts could include acquisition of spectrum, launch of additional satellites or use of compression technology.”
Schaeffler believes SBC could eventually end up with part or all of EchoStar, but Legg Mason’s Zito isn’t so sure. He thinks the telco is more interested in bringing in the minority of Cingular Wireless LLC it doesn’t already own before it even thinks about buying EchoStar.
“DBS is a single-product provider in a multi-product world, and that is a big issue,” Zito says. “EchoStar is an attractive asset. But I wonder if there is an appetite for it at this point.”
Schaeffler notes an important reason why EchoStar is unlikely to partner with another company any time soon. It’s no secret Ergen sparred fiercely with News Corp. chairman Rupert Murdoch when Murdoch tried to combine his DBS assets with EchoStar. The two companies and executives eventually parted ways.
Ergen is said to be no less difficult or demanding of his employees. Some employees — both former and existing — say long hours are required to stay abreast of the workload. “The internal joke over there is, “If you don’t show up on Saturday, you might as well not come in on Sunday or Monday,” one affiliate executive says.
Soraya Hesabi-Cartwright, a former executive vice president in charge of EchoStar’s customer service centers, left the company about a year ago and is now suing EchoStar for emotional duress and mental anguish. She allegedly claims Ergen continually berated her in front of other company executives. Her attorney was unavailable for comment at press time. EchoStar maintains the suit is without merit.
“EchoStar is pleased that after looking at the facts, the U.S. Equal Employment Opportunity Commission and the Colorado Civil Rights Division have declined to pursue any claim on behalf of Hesabi-Cartwright,” the company said in prepared statement earlier this month.
Regardless of what the future holds in store for EchoStar, Dish’s theme song is expected to repeat certain familiar refrains. “Charlie [Ergen] always wants to draw cable into a battle,” Leichtman says.
“There is really no need for the cable operators to go there, but they just can’t help themselves,” he adds. “But there is no reason to get into a fight with the perceived little guy, because the little guy always wins in those battles. And [Ergen] knows that. He’s brilliant that way. He knows the cable operators can’t resist his taunting It’s a trick he’s used in the past, and he’ll continue to use it as long as it work for him. And it always will.”