Local Channels Spur Strong DirecTV Sales

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Direct-broadcast satellite providers had fought the imposition of local-channel must-carry rules, but now that they're in place, DirecTV Inc. appears to be reaping the benefits.

In the wake of the best first-quarter sales season in the eight-year-old company's history, DirecTV revised its subscriber-growth guidance last week. After churn, it now projects it will net 1.2 million new subscribers for the year, excluding any customers brought in by its National Rural Telecommunications Cooperative partners.

That's up from the 1 million to 1.1 million it had previously projected.

DirecTV added 849,000 gross subscribers in the first quarter. After accounting for a churn rate of 1.6 percent, DirecTV added 350,000 net new subscribers.

The growth was attributed to simplified promotions and the fact that all local broadcast-TV stations were available in the 41 markets where DirecTV sells local-into-local service, said DirecTV president Roxanne Austin. Over 70 percent of customers in those 41 markets now sign up for local-channel packages, compared to 60 percent a year ago, she said.

"This is the first full quarter when we've had a true cable replacement in those 41 markets," Austin said. "Local channels had a tremendous impact on first-quarter sales."

DirecTV plans to add 10 new local markets this year; the first three will go live by mid-year.

Unlike most digital-cable packages, every DirecTV channel — including over-the-air television stations — is transmitted digitally.

And local issues have helped the DBS carrier in one specific local market, as well. In greater New York City, DirecTV's decision to carry the Yankees Sports & Entertainment Network — which will televise 130 New York Yankees Major League Baseball games this season — has brought tremendous exposure to the company.

YES EXPOSURE

Cablevision Systems Corp., an MSO with 3 million subscribers in the New York DMA, has declined to carry YES Network, citing its high per-subscriber cost and the programmer's insistence on offering the channel on basic. YES has countered with a public-relations and advertising blitz in which the regional sports network has urged Cablevision subscribers to switch to DirecTV.

It's been a plus even among those consumers who don't follow the Yankees, said Austin.

"People who are not even Yankee fans have one more reason why DirecTV is better than their cable provider," Austin told analysts in an earnings call last Monday. "We've had tremendous press in the print media, as well as on radio and television, that you couldn't pay for. It was great exposure."

Austin would not say whether DirecTV was losing money on the YES contract. But because it was the first provider to sign a carriage deal, DirecTV was given more favorable rates than might have been offered later, she said.

DirecTV also analyzed how failing to carry YES might have affected its churn, said Austin. The company did not say how many New York-area subscribers it had added.

Austin noted that DirecTV's sales were stronger in the first quarter of 2002 than during any previous first quarter, despite the weakened economy.

"Value actually plays well in an economic downturn," she said.

Unlike some other companies, late payments have become less of an issue for DirecTV.

"Bad debt is improving because of new policies we've implemented," such as a tougher credit-screening process for potential customers, Austin said.

DirecTV has reduced its rate of churn from last year's high of 2 percent per month to 1.6 percent in the first quarter. The company's goal is to bring it down to 1.5 percent through improved customer service, a continuing emphasis on annual-service contracts and broader local channel lineups.

Retailer-incentive programs are based on the ability to attract and retain longstanding subscribers.

In some cases, DirecTV will also shift its mass-market retailers from an inventory model to a certificate program, in which a retailer would sell the customer a certificate that could be redeemed fore a one, two or three-room DBS system. DirecTV would then deliver the hardware.

DirecTV's ads are focused on the service itself, and not the individual hardware brands, said Austin.

HNS BOOST SEEN

Although DirecTV will continue to rely on multiple manufacturers, Austin said it would give a significant amount of its business to sister company Hughes Network Systems.

Specialty consumer-electronics dealers could differentiate themselves by selling upgraded products, such as receivers with personal video recorders or high-definition television tuners, Austin said.

Subscriber-acquisition costs are expected to remain in the $525 range throughout the year, down from a high of $575 last year, Austin said.

The company's focus on profitable growth and reduced customer churn should help DirecTV reach its goal of full self-funding by the end of this year.

"The turnaround story at DirecTV is real," Austin said. "My job has been making DirecTV better every day, whether or not the merger goes through."

During an earnings call last Monday, Hughes Electronics Corp. CEO Jack Shaw said he remains confident the company's proposed merger with EchoStar Communications Corp. will receive regulatory approval by the fourth quarter of 2002.

Also during the call, DirecTV chairman Eddy Hartenstein said both companies agreed during merger-transition meetings on in-house control of the conditional access system and the billing platform, rather than reliance on outside vendors for those functions.

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