Sanford Bernstein’s Moffett Outlines Triple Threat to DBS Providers

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Sanford Bernstein analyst Craig Moffett offered a revised look at the direct-broadcast satellite sector Monday, outlining the three most immediate adverse effects he believes the weak U.S. economy will have on both DirecTV and Dish Network.

In his report, Moffett (left) said that the rough economy will result in higher DBS churn rates, resulting in less subscriber growth; lower ARPU (average revenue per unit) growth, as customers opt for lower-priced packages and disconnect premium channels; and lower capital spending, as take-rates for HDTV and DVRs slow.

“These three impacts yield slower revenue growth, and significantly lower cash flow projections,” Moffett wrote.

The analyst called ARPU the “wild card” in the recession.

“There is simply no precedent for forecasting how consumers will respond to the downturn,” Moffett wrote. “Broadly speaking, pay TV is largely non-discretionary, and is non-usage based. We therefore expect the satellite operators to hold up far better than the broader economy. Moreover, DirecTV's high-end customer base is likely to withstand the recession better than either Dish or the cable operators.”

In his report, Moffett said, “In the absence of empirical data on which to base our forecast for consumer retrenchment, we have opted to take a cautious stance, and have cut our ARPU growth forecasts sector-wide to reflect an expectation of severe stresses on the consumer. We expect DirecTV to be significantly better insulated in the face of a recession than either Dish Network or cable operators, both of whom have a less affluent subscriber base than does DTV (DirecTV).”

Moffett noted in his report that DirecTV has performed far better than Dish Network this year, but that both companies face the same challenges as DBS providers. 

“DirecTV has benefited from strong management, a clear strategy, solid execution, and a high-end customer base that has been relatively insulated from macro-economic stresses,” Moffett wrote. “Conversely, Dish has stumbled badly in a series of missteps. Their lower-end subscriber base and weak execution have led to a combination of rising churn and falling subscribership.”

According to Moffett, “In this context, it is tempting to grossly oversimplify things; DirecTV = goodandDish Network = bad. DirecTV’s economic results have continued to improve as their growth has gradually slowed. Dish Network’s stopped improving after their subscriber growth reached zero, and then began to deteriorate as subscriber growth went negative.”

But Moffett wrote that despite their different results during the past six months, DirecTV and Dish Network are more alike than different.

“They share the same basic technology, offer the same programming, cover the same footprint, occupy the same distribution channels, and compete against the same competitors,” Moffett wrote. “It is reasonable to question how long their results can so dramatically diverge.”