A pending lawsuit hasn’t made DirecTV gun shy about running aggressive TV commercials touting its expanded offering of high-definition channels, which won’t even be available until late this year.
In a new spot that aired last week, a DirecTV spokesman gave viewers the satellite company’s pitch.
“Stay focused for the next 30 seconds,” the spokesman, actor David Lee, said. “It’s all the time I have to tell you the truth about HD. Cable wants you to believe they’re keeping up with HD capacity. They’re not. DirecTV will be offering up to 150 HD channels. That’s three times more than cable.”
With ever-increasing fanfare, DirecTV is fighting tooth and nail to leverage HDTV as a means to maintain its position — and self-proclaimed advantage — as a provider of cutting-edge video. But cable operators aren’t taking DirecTV’s attack lying down, and a war of words has ratcheted up in the past month.
In early May, Comcast launched an aggressive print and radio campaign proclaiming that in a survey, satellite customers thought the cable operator had the best HDTV picture quality. Those ads sparked a false-advertising lawsuit by DirecTV, which in turn is being sued — also for alleged false advertising — over its TV commercials by Time Warner Cable. All of that litigation is pending.
HD is the future of TV, and DirecTV and its cable-company rivals are jockeying to convince pay TV subscribers that their picture quality and lineup of high-definition networks are the ones to choose. The subscribers at stake are high-end consumers, cherished by cable and satellite alike.
DirecTV is really banking on HDTV as a strategy for retention, to keep the more than 16 million subscribers it has now, according to analyst Bruce Leichtman. Although it’s pricey to upgrade existing subscribers to new HD digital recorders, these are customers who pay their bills and spend a lot for services. DirecTV doesn’t want to lose them.
“The reality is it’s about retention,” said Leichtman, president of Leichtman Research Group. “It’s not as much about acquisition. It’s about keeping your high-end subscribers.”
HDTV is also crucial to DirecTV in that it adds legitimacy to the satellite provider’s claim that it has the superior video service. Video is DirecTV’s core business, since it can’t depend on revenue growth from phone and Internet service, like its cable competitors.
Cable operators have challenged not only DirecTV’s boasts about its capacity to offer HDTV services versus cable, but also expressed skepticism about exactly how many — and which — national HD networks the satellite provider will actually offer by year-end.
“We [cable] need to be communicating that we have more HD programming today,” said Patty McCaskill, senior vice president of programming at St. Louis-based cable operator Suddenlink Communications. “They’re talking about the future.”
Cable executives maintain that a combination of options, from switched digital video to reclaiming analog space, will enable cable to eventually not only match but surpass DirecTV’s capacity to provide HDTV services.
But one fact is undeniable: The stakes are high for the nation’s biggest direct-broadcast satellite company.
Unable yet to duplicate cable’s triple-play bundle, DirecTV is betting on HDTV as a differentiator, an offering that will add more firepower and cachet to its video lineup, which boasts a crown jewel in the “NFL Sunday Ticket” out-of-market package of professional football games.
“This is a core video provider,” said Tuna Amobi, a Standard & Poor’s analyst. “They don’t have the advantage that cable has with the bundling, the phone and the data. So I think they’re trying to make their video as state of the art as best possible. For them to have a fighting chance, they really have to be very aggressive with their services.”
DirecTV last week said it was on target to vastly expand its HDTV lineup. The company said it “will have the capacity to launch up to 100 national HD channels” by the end of the year, and local HD feeds in up to 75 markets, by launching its DirecTV 10 satellite in June. Fresh HD services will start debuting in the third quarter.
DirecTV’s HDTV lineup will get bigger with the launch of a second satellite, DirecTV 11, set for early 2008. With the two new birds, DirecTV said it “will have the ability to deliver” 150 national HD channels and more than 1,500 local HD channels.
“The proof is in the pudding, per se, and people will see,” said Derek Chang, DirecTV’s executive vice president of strategy and development. “Once we get out there with the lineup that we have, the bulk of which will be all of your traditional channels simulcasting in HD, it’s going to be a very robust offering from us.”
EchoStar, in turn, will launch two more satellites by the end of the year, which will give it the capacity to offer 200 national HD channels and 100 HD local channels reaching 85% of the country, according to officials.
DirecTV has made a lot of noise in the market about HDTV, with slick ads featuring spoofs of Back to the Future and American Pie, showcasing talent from those movies like actor Christopher Lloyd. Last year, DirecTV spent $221.8 million on TV ads overall, according to TNS Media Intelligence. But at this particular point in time, DirecTV isn’t No. 1 in either HDTV customers or HDTV offerings.
At the end of last year, DirecTV had 1.8 million HDTV subscribers. It no longer breaks out HDTV customers separately, instead lumping them together with all its “advanced” subscribers, including those with regular digital recorders. Comcast ranks No. 1 in HDTV customers, with 4.7 million. Time Warner Cable has 2.1 million HDTV subscribers.
BATTLE OF PERCEPTION
Comcast officials are unfazed by DirecTV’s newest television commercial.
“We see the noise and the claims out there,” said Comcast senior vice president of sales and marketing Marvin Davis. “We watch television, but the fact is that our HD business is very strong. We continue to see consumer preference and satisfaction. We have not seen any indication that we are losing customers because of some future unspecified claims. So we still know that our strategy is right and we will continue to do that.”
Just last week, DirecTV announced deals that add content for its HDTV expansion. It’s hammered out an agreement to carry four Discovery HD channels — Discovery Channel, TLC, Animal Planet and The Science Channel — as well as two other HD channels that will be named and launched by Discovery at a later date. The HD simulcast feeds of the existing four networks will debut on DirecTV in September.
Also in September, DirecTV will launch three new Starz HD movie channels: Starz Edge, Starz Comedy and Starz Kids & Family, as well as Starz’s East and West coast HD feeds.
DirecTV said it has deals or agreements in principle to launch 34 HD networks.
Nonetheless, as for HD content, the leader now in terms of actual HDTV networks being offered is Dish Network, EchoStar Communications’ satellite service. It has 32 HDTV networks, compared with the roughly 14 DirecTV now offers for $10 a month.
One of the reasons that Dish Network has such a wide HDTV package is that it carries Rainbow Media’s suite of Voom HD services.
Dish Network’s HDTV offering may be big, but it hasn’t wowed cable operators.
“Dish has more, but if you look at the lineup, many of the channels I have never heard of,” said Cable One director of communications Melany Stroupe. “We never get requests for Kung Fu HD or Equator HD [two Voom networks].”
The No. 2 satellite provider, EchoStar, believes HDTV “is important to Dish Network … and to our overall strategy,” according to vice chairman and president Carl Vogel. But several media analysts said that HDTV is not a central component of CEO Charlie Ergen’s immediate game plan, as it is for DirecTV.
That’s why DirecTV is so aggressively marketing campaign its HDTV product, even though it won’t even be available until late this year and 150 national HD channels don’t even exist yet.
“Right now, it’s a battle of perceptions and DirecTV is winning,” said Craig Moffett, a Sanford C. Bernstein & Co. analyst. “DirecTV has what is, at least today, probably the weakest high-definition offering of any of the major video providers. And yet they are miles ahead in the battle for HD mindshare. But at the end of the day, the numbers don’t lie, and DirecTV’s HD penetration is still relatively low compared to cable.”
Leichtman said that DirecTV is “doing a great spin job” of making the market think they’ve got the most HDTV channels.
“You’ve got to look at not what their advertising says, but what the reality is,” Leichtman said. “So as of May 2007, the leader in HD programming is EchoStar … Who has the least channels is DirecTV.”
In fact, he said that DirecTV’s HDTV commercials are “stall ads,” trying to keep its subscribers from switching out to cable before the satellite provider ramps up its HDTV platform.
During first-quarter conference calls in May, executives at DirecTV and Liberty Media, which is acquiring News Corp.’s stake in the satellite provider, boasted about the satellite service’s HDTV plans.
Liberty Media chairman John Malone gave his imprimatur to DirecTV’s strategy “to essentially leapfrog everybody, both EchoStar and cable,” by using a fleet of satellites “that will allow them to massively increase their high-definition downstream fire power.”
That tack, combined with installing digital recorders that can store HD programs for later viewing, should “hit the sweet spot” of what the public wants, Malone told analysts May 8. That, in turn, gives DirecTV “a tactical advantage” until cable is able to match the satellite provider’s HDTV capacity, Malone said.
But it’s expensive for DirecTV to upgrade its existing subscribers to HDTV. That requires the satellite provider to install and underwrite the cost of pricey HD recorders, as well as to change customers’ rooftop dishes to pull in HD signals.
DirecTV charges existing customers a $299 upfront fee to upgrade to an HD-DVR, but offers new subscribers a $100 rebate on that fee. Even at that price, the satellite provider is underwriting the price of the HD-DVRs, which now cost more than $400, according to chief financial officer Mike Palkovic. By the end of the year, the cost of the set-tops that include the recorders will drop more than $100, Palkovic told analysts May 9.
Still, “it’s an enormous capital-spending program to retrofit all those subscribers,” Moffett said.
THE PRICE IS RIGHT
But the expense of upgrading subscribers is worth it, according to Palkovic.
“Adding customers with HD and DVR services is a top priority for us, because they generate superior financial returns,” Palkovic told analysts. “Incremental after-tax returns for customers who purchase HD and DVR services remained two to three times higher than returns for subscribers who only have standard boxes in their home.”
Long-term, HDTV should help DirecTV lower its monthly subscriber-churn rate, which is now 1.44%, according to Oppenheimer & Co. analyst Tom Eagan. HDTV customers have a lot more invested in the equipment and the service and are less likely to switch out.
In contrast, EchoStar seemingly is not pursuing HDTV this year as a key strategy the way DirecTV is. During EchoStar’s first-quarter conference call May 10, Ergen said “timing will be key” with HD, and that it will be cheaper to upgrade customers to HDTV next year when the set-tops cost less. Dish charges $20 a month for its HDTV tier.
HDTV is “a profitable business for us,” Ergen said. “But there are not 100 channels to put up. We carry everything today in HD that is worth carrying [and we think] there may be another half a dozen channels coming up this year that are worthy of taking.”
Cable operators say they are just as invested in providing the best HD service possible, as either satellite service.
“Our strategy on HD is the same or similar to all of our products: We believe we offer a superior experience,” Comcast’s Davis said. “For HD, that superiority comes in the form of quality of the picture; the number of viewing choices that are available at any one time; the ease involved in being able to get set up with HD; and then just an ease of pricing or value. We don’t charge you an additional fee for receiving the HD programming.”
Comcast charges a monthly equipment charge of $5 to $9 for an HD box, a few dollars more than a regular set-top. That box gets a subscriber all of the company’s HD programming.
At Time Warner Cable, executive vice president of product development Peter Stern touted his company’s HDTV value proposition versus satellite. Time Warner offers 17 to 21 channels for free as part of its digital-cable package, according to Stern. Just added: ESPN HD and ESPN2 HD.
Time Warner’s HDTV tier, which on average costs $7, includes fewer than a half-dozen HDTV channels that don’t have a standard-definition counterpart, like HDNet and Universal HD.
“We don’t charge our customers twice for the same programming,” Stern said. “Unfortunately for customers, the satellite providers do.”
Both Comcast and Time Warner claim they already best DirecTV. In a May 1 presentation to analysts, Comcast argued that on one particular night, it was offering 200 “HD Viewing Choices” in Philadelphia — when counting 180 On Demand selections — compared with 16 HD choices from DirecTV.
“We really try to deliver the HD programming people want,” Davis said. “Movies, sports, music, that’s what people tell us they want. And when you define it that way, we offer people the most choices.”
DirecTV’s Chang finds Comcast’s pitch that it has 200 HD “choices” a stretch.
“Given their deficiencies, they’ve got to do what they’ve got to do from a marketing standpoint,” Chang said. “In reality — when our offering is out there versus theirs in terms of what we’re delivering on a full-time basis — it’s going to be pretty clear our claims in terms of our HD leadership and our content leadership are going to be much superior to what they have.”
DirecTV continues to boast that it will have three times cable’s capacity to offer HDTV. In fact, it was that DirecTV claim, and its assertion in other TV spots that “for an HD picture that can’t be beat, you’ve got to get DirecTV,” that prompted Time Warner to file a false-advertising suit against the satellite company last December.
A federal judge in February ordered DirecTV to stop running ads regarding its HDTV picture quality, but refused to block the Lloyd ad regarding DirecTV’s HD capacity versus cable. The overall suit is still in litigation.
Time Warner and Comcast claim the satellite provider won’t have an edge, in terms of capacity, for long. New technology, namely switched digital video, will enable Time Warner to free up bandwidth and potentially offer an unlimited HDTV selection, according to Stern. With that technology, a channel is only sent to a subscriber when requested.
“So you hear DirecTV talking about 100 channels breathlessly,” Stern said. “And you hear Dish talking about 30 channels. We’re talking about unlimited [HDTV networks], so long as we can switch.”
Time Warner is using switched digital video to deliver HDTV in four divisions, and it will have the technology in the majority of the company’s other divisions by the end of the year, Stern said. Similarly, Comcast plans to do trials of switched digital video this year. Both it and Time Warner are also reclaiming analog space to free up bandwidth for HDTV.
But Chang argued that switched video “is not really a full-time channel,” adding, “I guess the question to ask cable is does it have the capacity to run 200 channels 24/7 in HD.”
DirecTV is still assembling its enlarged HDTV platform, which could include several full-time channels dedicated to pay per view.
“There are going to be 100 channels that are running full time in HD, but it’s not necessarily all dedicated to a traditional linear channel per se,” Chang said. “But I think the bulk of it certainly will be. We are not sitting here spouting off a two-hour movie or a three-hour game as an HD channel.”