DirecTV Bullish on DSL Adds

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With its satellite broadband Internet-service provider still in high market orbit, DirecTV Inc.'s down-to-earth digital subscriber line unit is forging ahead with expanded service plans in 2002.

DirecTV DSL, created when the direct-broadcast satellite company acquired Telocity Corp. in April 2001, had signed up 91,000 customers by the end of 2001. And while its future will depend in part on the looming merger between DirecTV and EchoStar Communications Inc., DirecTV DSL enters 2002 with several goals, including expanded services, beefed up customer assistance and a more efficient network.

DirecTV DSL CEO Ned Hayes won't speculate about the merger's impact on his business. But he does say the unit is shifting its focus in 2002 to target a more mainstream customer looking for broadband's accompanying services, not just its zippy throughput.

This year promises an improvement for DSL compared to a disastrous 2001, which saw competitor after competitor flame out. But Hayes also pointed out that cable competitor Excite@Home Corp. did no better in 2001, and that gives DSL a new marketing weapon.

"The seed of doubt has absolutely been planted now in the cable marketplace with the demise of Excite@Home," Hayes said. "They are absolutely facing the same doubt issue that the cable guys preyed so heavily upon DSL in 2001."

Meanwhile, potential customers are in no short supply. Despite fierce competition between cable and DSL, only about 10 percent of the 90 million U.S. households have adopted broadband. Reaching the remainder is going to require different tactics, Hayes said.

"It won't be the early adopter anymore that is our current customer and is our next customer. It will be the family that is very interested in education, it will be the single professional that is very interested in attaining and maintaining life balance," he said. "It won't be about bits and bytes, it won't be about speed, it won't be about news groups, it won't be about video on demand and it won't be about gaming."

One way to lure those mainstream customers is to drop the price. The DSL unit began the year with a promotion offering DirecTV customers its service for six-months at $34.99 per month.

DirecTV DSL intends to add more spam filters and network-based parental control filters, along with improvements to customer service and network reliability. The unit is also planning a mid-year debut for voice over DSL, delivered using DirecTV DSL's proprietary gateway home device.

Adding voice to DirecTV's video and data planks will make the company "very robust in competition with cable," Hayes said. "I think the brand umbrella has terrific offensive if not defensive set of arrows in its quiver to bring against the digital cable and cable-modem offer that is out there in the marketplace right now."

But the huge question mark for observers is the unit's fate if EchoStar acquires DirecTV — after all, EchoStar CEO Charlie Ergen did criticize DirecTV for acquiring Telocity, arguing the company would be better off partnering with the DSL provider rather than buying one outright.

But that doesn't mean that the DBS provider is opposed to DSL, according to Marc Lumpkin, EchoStar's director of communications. Lumpkin pointed out EchoStar's latest 721 PRV box contains a port for a DSL or cable-modem link. Whether DirecTV DSL will continue or what role the unit will fill in the merged DirecTV-EchoStar operation has not been determined, he added.

"Those are all questions that will be answered after the merger, but those are things that the transition team will be looking at," Lumpkin said.

Still, much of DirecTV DSL's fate lies in its ability to prove itself in the coming year, according Joe Laszlo, broadband analyst for Jupiter Research.

While customer numbers did grow, the unit is still losing money, posting negative cash flow of $32 million in the fourth quarter.

Telocity was one of the DSL self-installation pioneers, which tends to lower customer acquisition cost. "I would think that DirecTV DSL has a little bit of an advantage there that might help to justify its long-term existence," Laszlo said.

"Definitely lowering up front costs is going to be important there, and the more that they can piggyback on top of marketing efforts from the TV side of the house — the more they can cut their customer acquisition costs. Again, that would probably help justify keeping it in-house," he said.

Many wondered why DirecTV bought Telocity, but "it became much clearer to me that it is indeed a competitive response to the rollout of digital cable and cable broadband," Laszlo added. "I would give them the benefit of 2002, and if it looks like they are clearly on track to becoming cash-flow positive by the end of the year they would be worth keeping around. If not, that would be when I would start thinking of other strategies for offering broadband services to customers."

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