News

In ITV, DBS Holds the Lead — for Now

11/18/2001 7:00 PM Eastern

Direct-broadcast satellite providers EchoStar Communications Corp. and DirecTV Inc. have gotten the jump on U.S. cable operators in terms of rolling out interactive-television services.

And the DBS companies' planned merger could eventually increase the nationwide deployment of satellite ITV — which currently includes personal video recording and such enhanced TV content as interactive news, sports, weather and shopping.

Those who are familiar with EchoStar and Charlie Ergen — its highly competitive chairman and CEO — believe that a merged company would aggressively deploy ITV services, despite some concerns within the ITV community about the company becoming a monopoly.

"I do not envision EchoStar becoming a big, slow monopoly," said James Ackerman, CEO of OpenTV Corp., which provides middleware and interactive content applications for EchoStar's set-top boxes. "EchoStar is not slow at anything."

"They're in a war for customers," said August Geise, who heads the cable and satellite communications industry segment of Accenture Ltd., a technology-management consulting company. "We think EchoStar will continue to be aggressive in going after cable customers."

In 2000, Accenture estimated, satellite services captured about $1 billion in potential new revenue from cable operators. And DBS's greatest threat to MSOs stems from the fact that the most vulnerable subscribers are cable's best — those who take premium, pay-per-view, digital and ITV services.

Currently, DBS controls 51 percent of the total U.S. ITV market, according to media-research firm The Carmel Group.

Satellite accounted for 2.5 million of the 4.9 million U.S. ITV-enabled devices. Stand-alone devices, such as PVRs and Microsoft Corp.'s WebTV units, comprised 1.4 million or 29 percent of all ITV devices, and ITV-ready digital-cable set-tops were in third place with 1 million subscribers (20 percent), The Carmel Group said.

"The best thing for ITV to come out of this potential deal is that there will be a single platform," said Jim Stroud, senior analyst and editor of The Carmel Group's DBS Investor
newsletter. "The downside is DirecTV and EchoStar have pushed each other to stay ahead of cable — and pushed to stay ahead of each other. One of our concerns is that it may stymie innovation and creativity a bit."

Satellite ITV services have placed pressure on cable operators to provide differentiated services such as video-on-demand, high-speed Internet access and bundled broadband packages, market analysts said. Those services afford cable a clear technological advantage over DBS.

But cable has rolled out VOD and other broadband services on a market-by-market basis, while DBS companies have used their national satellite footprints and nationwide retail partnerships to deploy services more quickly — and on a larger scale.

PVR S VS. VOD

Ergen has hailed the virtues of PVRs (also referred to as digital video recorders), which employ a hard drive to enable users to record shows, pause live TV and time-shift their viewing. PVRs are perceived as DBS's bid to forestall VOD.

EchoStar reportedly has about 500,000 PVRs in the field, although officially the company will only say there were more than 250,000 units as of last spring. It has not released figures for its DishPVR 501, a set-top with integrated PVR capability.

Recently, Ergen repeated a vow to financial analysts: he'll distribute 1 million DishPVR 501s by the end of second-quarter 2002.

EchoStar plans to demonstrate a next-generation PVR at January's Consumer Electronics Show, "with rollout soon to follow," a company spokesman said. The unit will include a larger hard drive than the DishPVR 501 and high-speed digital subscriber line capability that can provide a superior return path for interactive applications.

DirecTV offers an integrated PVR that uses TiVo Inc. technology and another unit with Microsoft Corp.'s UltimateTV service. Unlike EchoStar, DirecTV charges a monthly service fee. The company has not released sales figures.

DirecTV has been more aggressive than EchoStar in providing interactive programming and advertising. Nearly 2.6 million homes have DirecTV Interactive, which provides content enhanced by Wink Communications Inc. at no additional charge. DirecTV has also said it will offer America Online's AOL TV interactive product.

DirecTV also has launched so-called "virtual channels" that provide a full video channel with Wink interactive features that can be accessed by TV remote. They include ESPN Today, which offers access to sports headlines, statistics and standings; and The Weather Channel's Instant Weather. Consumers can also buy books from the Barnes & Noble.com channel and CDs from Music Choice.

A news and information service from NBC is in the works, DirecTV representatives said.

One-third of DirecTV Interactive-enabled subscribers use the service once or more a week, DirecTV said. More than 50 percent use it at least once a month.

EchoStar has rolled out interactive content more slowly. It currently offers a weather service developed by OpenTV. Its DishPlayer 500 set-top includes applications based upon Microsoft's WebTVPlus and MSN Internet access.

EchoStar recently filed suit against Microsoft, claiming the software giant had failed to provide adequate marketing support for its applications on the DishPlayer 500.

Ackerman said EchoStar is preparing to use the OpenTV platform — currently in more than 2 million Dish Network-branded set-tops — to launch a broad array of enhanced entertainment and information.

IS ITV A BUSINESS?

Neither General Motors Corp.'s Hughes Electronics Corp. — the parent of DirecTV — nor EchoStar discloses financial information on ITV services. So far, analysts said, ITV has contributed little to either company's bottom line.

"It's still a nascent business," said DirecTV senior vice president of advanced products and new media Brad Beale. "The revenues aren't going to blow you away today and the usage isn't going to blow you away today. But the only way to do this right is to get in the game and do it, and learn what consumers want."

DBS providers rely upon ITV to differentiate the service and to retain subscribers. Beale said PVR functionality is a strong retention tool because once consumers discover the benefits of a hard drive, it becomes "a pretty critical service."

EchoStar is looking to do more than just retain subscribers; it wants to generate ITV revenue. The merger would give EchoStar — which has about 6.4 million subscribers — an opportunity to offer services on a platform that would serve more than 16.7 million homes.

"They're very keen to see ITV be a revenue generator," Ackerman said.

Being a pioneer can have its disadvantages. Recently, EchoStar found that its PVR service produced the unexpected result of reducing its PPV buy-rates, according to sources.

An EchoStar executive acknowledged the cannibalization effect during an Advanced Television Forum, according to the industry newsletter Interactive TV Today. A spokesman said the company does not comment on buy-rates.

DirecTV has not conducted an analysis of PVR's effect on PPV, but Beale said he doesn't believe there's been cannibalization.

"If anything, they're our best customers and purchasers of additional services," he said

THE STARTING GUN

Interactive TV vendors are concerned that the merger-approval process — which is already off to a difficult start — will distract EchoStar and DirecTV and delay the starting gun in the ITV race between cable and satellite.

"I'm of the mind that EchoStar and DirecTV will do very little," said one executive with an ITV startup.

DirecTV said it would keep moving ahead. "Near-term, our plans won't change at all. We've got business plans and projections to meet," Beale said.

"EchoStar has been aggressive, and we line up pretty well with our platforms and services," he added.

After the merger was announced, cable operators acknowledged the merged company's competitive stature. But some said a protracted approval process could provide cable with breathing room to upgrade plant and deploy services.

Beale, who has worked at DirecTV for 10 years, said: "My experience has been that until the operator really feels threatened, he won't make the investment to move forward. Most wouldn't have upgraded to digital unless DBS was as successful as it was in terms of delivering higher quality and new channels."

Accenture's Geise said DBS already is a "serious threat" to cable, and operators must respond.

"For cable and satellite, this [merger] just ups the ante," he said.

Though DBS initially focused on markets underserved by cable, it can "move down into the mainstream of cable customers," Geise said. And once cable subscribers jump to DBS, he said, it's difficult and expensive to win them back.

Accenture has conducted market research that shows that subscribers are generally drawn to satellite by additional channels, broader programming choices, better quality, lower prices and ease of use, as well as dissatisfaction with cable's customer service.

The Accenture research also shows that cable subscribers have a high interest in the same digital services that can be used to fend off DBS. Geise said the top five services for subscribers are VOD, PVRs, enhanced TV content, high-speed Internet access and interactive games.

DBS currently uses a telephone back channel for interactivity, which limits its ability to match cable's ability to deliver rich interactive applications or VOD with full VCR functionality. Simple interactive content is sent to the satellite set-top, so a consumer interacts directly with what's stored in the box.

While VOD is widely perceived as cable's antidote to DBS, Geise said operators must deploy the technology carefully to make the economics work. He predicted operators will give higher priority to VOD deployments in those markets with the best chance for a return on investment — markets in which DBS has encroached.

Though DBS has the lead in ITV, cable can offer bundles of broadband services. The satellite companies have struggled with Internet access due to technological limitations, but are refining their services to expand their rollout.

EFFECT ON VENDORS

For ITV technology vendors, a merger potentially provides a much larger platform for their product. But it also eliminates the ability to make deals with a second DBS distributor. At present, a vendor could potentially sign with one company while wooing the other.

A combined EchoStar-DirecTV will have to either deploy ITV applications that work on each platform or unite them under a single offering. EchoStar said it plans to continue marketing the Dish Network and DirecTV brands separately.

The deal could spur consolidation in the software segment, as has been predicted for some time, said Geise.

EchoStar still might need multiple suppliers, though, Geise said. It could spread the work among its vendors by outlining a uniform set of architectural requirements, as Time Warner Cable has done with its digital development.

EchoStar seems inclined to control equipment development as much as it can. The company builds its own receivers, for example. EchoStar also is an investor in Rearden Steel, a company headed by former WebTV leader Steve Perlman that's developing a high-end set-top that can handle broadband applications and be sold at retail.

A combined EchoStar-DirecTV will have much to sort out in the ITV business. One thing DBS does not intend to do is sit still, Beale said.

"Cable, with digital, has the opportunity to level the playing field, so we have to keep pushing the envelope," Beale said. "If we're just 500 channels of pretty pictures five years from now, we're toast."

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