Satellite

Further To Fly

5/22/2005 8:00 PM Eastern

DirecTV Inc. has spent more than a decade brawling for each new subscriber, and it shows no signs of backing away from the fight. Earlier this month, the direct-broadcast satellite provider reported it added a record 505,000 net new subscribers in the first quarter of 2005, surpassing analysts’ predictions. Of course, DirecTV has always had a habit of outperforming expectations.

Following the launch of its DBS service in 1994, DirecTV surprised many by winning over more than 1 million customers in its first year. Lately, DirecTV has been signing up more than 1 million subscribers per quarter, before churn is factored in.

DirecTV at a Glance
Category Amount
Total subscribers (Q1 2005): 14,450,000
Total subscribers (Q1 2004): 12,630,000
Net subscriber additions (Q1 2005): 505,000
Net subscriber additions (Q1 2004): 460,000
Average revenue per subscribe (Q1 2005): $65.78
Average revenue per subscriber (Q1 2004): $63.57
Telco partner subscribers — gross (Q1 2005) 150,000
Local-to-local broadcast markets 132
Total DVR subscribers (Q1 2005) 1,900,000
Total HDTV subscribers (Q1 2005) 640,000
Source: DirecTV Inc.

Some say that kind of growth is not sustainable, and that DBS subscriber growth probably peaked in 2004. There are plenty of challenges to consider, including cable’s advanced services, DBS rival EchoStar Communications Corp., and the evolving interests of DirecTV’s telephone partners. Others admit that they’ve made similar predictions in the past only to be proven wrong.

DirecTV CEO and president Chase Carey says he doesn’t focus strategy around Wall Street expectations but around what makes sense for the company.

“We don’t expect to see the growth we saw last quarter or last year in perpetuity,” Carey says. “But for the next two to three years, we expect to continue to see solid growth.”

The company expects to net 1.25 million to 1.5 million new subscribers in 2005. Ultimately, the DBS platform will reach 20 million subscribers, up from its current level of about 14.5 million, Carey predicts.

Oppenheimer and Co. analyst Tom Eagan says his firm projected DirecTV’s year-to-year net growth would peak in 2004, and he doesn’t think that estimate will change for DirecTV or the DBS business in general.

New DBS growth will come from additional numbers of overall TV households, a decline in broadcast-only households, a decline in the number of C-band satellite customers and taking market share away from cable, Eagan adds.

“The natural growth is about 1.7 million homes per year, plus the share shift from cable,” Eagan says.

Others certainly see room for DBS optimism in general. “DBS will eventually grow to the 30- to 35-million [subscriber] range,” predicts telecom consultancy Tellus Venture Associates president Steve Blum. That would be up from the current total DBS count of more than 25.5 million.

But future growth will come despite stiffer challenges in markets where cable offers advanced video services. Eagan says cable’s video-on-demand services appeal to consumers, especially those with young children, because it’s easier to navigate than a digital video recorder.

Carey acknowledges that many cable operators have improved their video service in recent years, “which is why we have to continue to improve.”

DirecTV plans to use its new DVR platform from News Corp.’s NDS Ltd. division. The platform is set to launch in July, and will include a pay-per-view service that downloads movies to a hard drive. Sixty hours of space will be devoted to the on-demand service, says DirecTV senior vice president of advanced services and content Eric Shanks. DirecTV customers won’t be charged for a movie until they select it for viewing. And if they don’t purchase it during the PPV window, the movie will be automatically removed from the DVR’s hard drive.

Many industry insiders are watching DirecTV’s evolving relationship with DVR partner TiVo Inc. Carey says DirecTV will continue to offer the TiVo product, but starting later this year, the DirecTV-branded DVR from NDS will become the company’s core product for new technologies such as HDTV, VOD and its home-media center.

Forrester Research Inc. vice president Josh Bernoff says it may be risky for DirecTV to move away from TiVo at the same time cable operators like Comcast Corp. begin to offer the popular DVR brand.

In addition to its DVR, DirecTV is deploying interactive-television services this spring and plans to introduce local HD broadcast channels in 12 markets by the end of this year.

“Right now our biggest opportunity is to continue to take advantage of the leadership position we have in television,” Carey says. “For us, it is an opportunity, as our competitors focus on telephony and broadband, to expand on our business leadership in television.”

That strategy makes it more important for DirecTV to maintain some content edge. Analysts credit its exclusive NFL Sunday Ticket package with driving DirecTV’s market share, and they point to the urgency of maintaining that exclusivity. DirecTV’s current contract with the National Football League runs through the 2010 season, so there’s no immediate danger of losing that juggernaut.

But the focus on TV flies in the face of cable business strategy, during an era when the word “bundled” is the all-important mantra. Cable & Telecommunications Association for Marketing president Char Beales calls DirecTV’s focus on television “a great strategy for them, because it’s their only strategy.”

Some industry observers debate the importance of the bundle to multichannel television. Among them is Tellus’s Blum, a veteran DBS executive, who says that while cable operators have the fastest broadband pipe today, other players will eat into that market within the next five to 10 years by offering faster speeds.

Although DirecTV hasn’t ruled out delivering broadband via satellite, it’s not something Wall Street is urging it to do.

“For the foreseeable future, broadband service makes the most sense through partnerships,” Oppenheimer’s Eagan says. “History has shown satellite delivery of broadband has not been that successful.”

TELCO SUPPORT COULD DWINDLE

Jimmy Schaeffler, chairman of the satellite research consultancy Carmel Group, predicts competition from bundled telecom services will heat up as telephone companies deploy more advanced fiber networks. “Once the telcos come into this, it’s a new game for everybody,” Schaeffler says. He also warns that as DirecTV’s telco partners deploy their own fiber bundles, they could abandon their support of satellite.

Eagan predicts that at least some telcos would limit their focus on fiber-to-the-home rollouts as they concentrate on marketing long-distance services to businesses. And among telcos who don’t want to work to get local franchise approvals to offer television, “they might focus on DBS partnerships as an easier way to grow the video business.”

Earlier this month, EchoStar chairman Charlie Ergen said its telco partner SBC Communications Inc. had begun to de-emphasize its Dish Network sales, and he warned the same thing could happen with DirecTV’s telco partnerships.

That would be particularly significant, because in DirecTV’s first-quarter earnings call, Carey credited its regional Bell operating company partners with a significant portion of DirecTV’s early 2005 growth. “We saw 150,000 gross additions from the RBOCs,” he says, referring to Verizon Communications Inc., BellSouth Corp., Qwest Communications International Inc. and Cincinnati Bell Inc.

Carey noted that DirecTV has very little history with the RBOC sales channel, but added, “Our expectation is customers taking a bundle of services will have the benefit of lower churn.”

In addition to DirecTV’s RBOC relationships, Carey attributes the first-quarter subscriber gains to sales in former National Rural Telecommunications Cooperative territories and its Para Todos Spanish-language programming packages.

Carey admits that much of the past year has been devoted to restructuring issues surrounding DirecTV’s new ownership, including integrating the NRTC and Pegasus Systems Corp. markets and adding more local-to-local markets where it had lagged behind the competition. Until DirecTV bought out their interest last year, the NRTC and Pegasus held exclusive rights to sell DirecTV programming packages in certain rural territories. In recent years, DirecTV had lost market share in some of those rural markets to EchoStar, which was more aggressive in launching local-to-local coverage.

DirecTV also saw sweeping changes in its management over the past year, including the recent departures of veterans like former vice chairman Eddy Hartenstein and executive vice president of programming Stephanie Campbell.

Carey doesn’t anticipate the same kind of management changes going forward. “I feel quite good about the management team,” Carey says. “It’s a leaner team and structure.”

CABLE’S NEWS CORP. FEARS

Many in cable had been bracing for a fight once News Corp. chairman Rupert Murdoch took over managing control of DirecTV after General Motors Corp. decided to get out of the business.

“Cable feared DirecTV would be more of a threat under News Corp. ownership,” CTAM’s Beales says, “but it’s about the same kind of threat.” She adds that the fear is still there that a more competitive DirecTV could arise under Murdoch’s watch.

Some say it would be wise for cable to keep a watchful eye on Murdoch. “His game plan is a much more forward-thinking game plan,” says TVPredictions.com president Phil Swann. “He’s thinking more of 2007 and beyond rather than now.”

DirecTV plans to introduce new content after it moves new set-top boxes into the market. “Our relationship with Fox gives us the ability to offer unique programming experiences,” Carey says, referring to DirecTV’s corporate siblings — the Fox broadcast network and Fox Cable Networks Group. Carey declined to elaborate. Ultimately, DirecTV and News Corp. plan to push technologies and cost savings across a global satellite platform, similar to such direct-to-home platforms as British Sky Broadcasting and Star TV in Asia.

The DBS company doesn’t plan to limit its revenue stream to home-based services. It’s in the early days of delivering DirecTV programming to cars, Carey says, and it’s also starting to explore sending content to handheld devices.

As subscriber-acquisition costs continue to grow for both DirecTV and Dish, both services are looking for new ways to make sure new customers stick around long enough to become profitable. DirecTV recently added a new credit-check policy that would require consumers without the proper credit rating to submit a down payment before activating their account. Carey admits DirecTV could take a hit on gross subscriber additions in the short term, but added the new policy would help cut down churn.

DBS RIVALRY

Carey contends that cable is a bigger competitor to DirecTV than EchoStar, in large part due to its bigger market share. But some say the competition between DirecTV and EchoStar is so heated that it has been difficult for the two companies to work together, even for their mutual benefit.

The Satellite Broadcasting & Communications Association recently disbanded its Washington, D.C., lobbying efforts. Former SBCA president Chuck Hewitt says the move hurts both companies.

“There has to be cooperation and a willingness to work together in order to be a powerful force on Capitol Hill,” Hewitt says. He says he had hoped to see more cooperation between DirecTV and EchoStar once News Corp. took over management of DirecTV, but that hasn’t happened.

Indeed, DirecTV could give EchoStar a run for its money in the fight for DBS subscriber growth, Blum predicts. Credit checks aside, News Corp. is all about market share.

“With News Corp. coming in and concentrating on market share versus quality of subscribers, it’s a little problematic for EchoStar,” Blum says. “They’re still in a market share game.”

September