Aiming High Pays Off for DirecTV

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DirecTV and Dish Network have long
operated at opposite ends of the pay TV spectrum, with DirecTV
focusing on higher-end satellite homes and Dish on
lower-end, price-conscious customers. Given the fourthquarter
results issued last week by both companies, the
high-end appears to be winning handily.

DirecTV reported results on Feb. 23, highlighted by a gain
of 289,000 net new customers in the period and strong financial metrics — revenue was up 8%, and operating profit
before depreciation and amortization rose 4%.

While DirecTV continued to show gains domestically
— net new customers increased by 663,000 for the year —
its Latin American operations were an even bigger growth
story. In Latin America, DirecTV added 1.2 million net new
customers, its biggest growth spurt in that area ever.

In a research report, Sanford Bernstein cable and satellite
analyst Craig Moffett wrote that while U.S. performance
was “spot on,” DirecTV’s Latin American business
is quickly becoming its crown jewel.

He added that Latin America beat analysts’ expectations
on revenue growth (up 23% vs. consensus of 15%), margins
(33.2% vs. Street estimates of 31.6%) and subscribers
(378,000 vs. Street consensus of 295,000); and the unit is now
free-cash-flow-positive, generating about $59 million in free
cash flow in the quarter.

“So what’s not to love?” Moffett wrote.

At rival satellite service Dish Network, which reported
fourth-quarter results a day later, on Feb. 24, the mood was
decidedly darker. Dish shed 156,000 subscribers in the period,
the biggest quarterly loss in company history.

While Dish has struggled with subscriber losses in the
past — it has now shed customers in three of the last four
quarters — analysts had
hoped the satellite giant
was turning a corner. And
though Dish finished the
year in the black — it added
a total of 33,000 customers
for the full year — that corner
seems farther away than
ever.

In a research report, Moffett
wrote that Dish’s results
bore “almost no resemblance
to the stellar quarterly
performance of DirecTV
just a day ago.” And though
Moffett wrote that both
companies focus on different
market segments, “they
might as well be operating
on different planets.”

While Dish blamed much
of the subscriber losses on
a month-long carriage dispute
with Fox Networks (FX,
NatGeo and 19 regional Fox
Sports channels were dark
between Oct. 1 and Oct. 29),
a tough economy and competition,
Moffett pointed to
other troubles. According
to the analyst, gross additions
were at near all-time lows, revenue growth was flat
sequentially, subscriber acquisition costs (SAC) were up,
and churn grew substantially.

Gross additions were
653,000 in the period, well
below analysts’ consensus
of 764,000 additions. Add to
that increased SAC (to $837
per gross addition, above
consensus of $802) and
higher churn (at 1.88%, a 44
basis-point increase from
2009), and the picture looks
even bleaker.

“Dish is now capturing
only 36.9% of customer decisions
in the satellite industry,
near the all-time
low set in Q1 09,” Moffett
wrote on Feb. 24. “Yesterday,
DirecTV pointed to cable
for ‘most’ of its growth.
But Dish Network is doing
all that it can to help.”

Not every analyst painted
as gloomy a picture for Dish.

Pivotal Research Group
principal and media & communications
analyst Jeff
Wlodarczak was disappointed
on the subscriber performance,
but saw the lower
gross additions as a function
of more stringent credit
requirements from Dish. He
predicted that 2011 would
be a better year for the satellite-
TV giant, mainly because
most of the subscriber
losses were due to a onetime
event.

Excluding the Fox dispute,
Wlodarczak estimated
that churn was 1.66%
and customer losses a more
manageable 31,000 in the
period.

Morgan Stanley media
analyst Ben Swinburne
wrote in a report that while
Fox was a factor, it doesn’t
totally explain the decline in
gross additions. Gross additions declined 23% in the quarter
(compared to an 8% drop in the third quarter), which
“suggests customers are not responding to the marketing
message.”

Dish Network chairman Charlie Ergen appeared flustered
by his company’s performance, but added that he
was not willing to sacrifice long-term financial health for
short-term customer growth. Ergen noted that he is loath
to heavily discount his core video product like some of his
competitors.

“Our guys have an economic number they can work with
and they are only allowed to go after economic customers,”
Ergen said. “I think there are a lot more economic customers
that we can get than we’re getting. But they can’t go
out and match every programming offer and give away the
store just to get customers and please Wall Street.”

But, he added, there is room for improvement.

“I’m disappointed that we’re not getting customers,” Ergen
said. “Are there 1 million gross adds a quarter out there for us
that are economic? Yes there are. We’re not getting them, so
we’re not operating as efficiently as we should.”

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