Stalled Growth Threatens DBS Sector

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As EchoStar Communications Corp. assembled a war chest to make a play for DirecTV Inc, the leading direct-broadcast satellite service's parent said last week that it would revise its subscriber-growth guidance downward.

Hughes Electronics Corp. projected DirecTV would add only 1.3 million net new subscribers for the year, rather than the 1.5 million or more it had originally forecasted. Second-quarter numbers are expected to be off significantly from earlier projections.

DirecTV was expected to hit the 10-million subscriber mark earlier this spring, but last week said it now plans to reach that goal by the end of the second quarter.

In a research note last week, Morgan Stanley Dean Witter analyst Vijay Jayant predicted that DirecTV would add 175,000 new subscribers for the second quarter, down from the earlier projection of 300,000. The analyst also said he expects EchoStar to report between 350,000 and 370,000 net new subscribers for the quarter.

EchoStar still plans to meet its target of 1.5 million to 2 million net new subscribers for the year. The company, which launched Dish Network three years after DirecTV came to market, announced June 11 that it had signed its 6 millionth Dish subscriber.

The company's resulting stock jump was relatively short-lived. Following reports of DirecTV's disappointing subscriber growth, EchoStar's share price also fell last Tuesday, although not as dramatically as Hughes stock.

By last Wednesday, though, both stocks began to rebound, likely due in large part to published reports that EchoStar was close to securing $3 billion in bridge loans that would allow it to make a run for Hughes.

Hughes parent company General Motors Corp. is looking to sell the company.

Last Tuesday, EchoStar and DirecTV filed a joint motion for a 60-day stay of an antitrust suit pending against DirecTV and several of its retail partners.

"Recently, representatives of GM and EchoStar have conducted preliminary discussions as to whether a transaction leading to a business combination of EchoStar and DirecTV would be mutually desirable," said the motion.

"Were such a transaction to occur, it would undoubtedly result in the termination of this lawsuit," it later read.

The companies also said a stay would permit them "to pursue their discussions without the distraction of this suit."

In an on-air chat with subscribers June 11, EchoStar chairman Charlie Ergen acknowledged that his company was interested in buying DirecTV, but added that the companies had not yet begun formal negotiations.

"We listen to their ideas, and we have an obligation to look at any serious proposals," GM spokeswoman Toni Simonetti said last Wednesday about the status of the Hughes talks with EchoStar.

"We are not negotiating with EchoStar," Simonetti added. "We are negotiating with News Corp. and [subsidiary] SkyGlobal."

Simonetti could not offer a timeline for a possible decision on a Hughes merger with SkyGlobal.

In a call with analysts last Monday, newly named Hughes CEO Jack Shaw admitted that the drawn-out talks to merge the company with News Corp.'s SkyGlobal Networks division have been a major distraction and have negatively affected its performance. Shaw said he has asked DirecTV global chairman Eddy Hartenstein to jump back into running the day-to-day business of the company.

DirecTV last week also reported its subscriber-acquisition costs for the second quarter were expected to rise to $575. Several factors contributed to the increased costs, including subsidies paid to retailers for multiple boxes per household and increased activity by hackers.

To help discourage hackers, Hartenstein said DirecTV recently changed its agreement with RadioShack Corp. It will now pay the retailer commissions based on service activations, rather than just equipment sales.

Some industry observers said that DirecTV has more problems with signal theft than EchoStar because of its more-coveted programming, which includes out-of-market sports packages and additional pay-per-view movie choices. Others have said DirecTV is not as aggressive in implementing the electronic countermeasures that can thwart piracy.

The slowing U.S. economy also affected DirecTV sales for the quarter. Consumer-electronics chains reported lower-than-expected retail sales in recent weeks. In addition, DirecTV is seeing fewer sales in rural markets from its National Rural and Telecommunications Cooperative partners, most notably Pegasus Communications Corp.

Hartenstein said DirecTV would strengthen its distribution through relationships with independent dealers, Blockbuster Video stores and a new direct sales/lease model from the DirecTV's home-services division.

DirecTV plans to stimulate sales for the remainder of the year through the use of more targeted promotional campaigns in those markets where cable rates have risen most dramatically and where it offers local broadcast signals.

For their part, cable operators at last week's National Show said they're not overly concerned about the potential competitive threat from a DirecTV takeover by SkyGlobal or EchoStar.

Cable executives said they've made significant advances in technology and customer service since DBS entered the market.

Comcast Corp. cable unit president Steve Burke argued that even though DBS has taken away some of the industry's customers, cable's better off than it would be today without that competition.

If not for the threat of DBS, said Burke, operators would have deployed digital cable later. And had cable systems not upgraded to two-way plant, many would not have launched high-speed cable-modem service.

"At the end of the day, competition works," Burke said. Given cable's two-way broadband technology, he added, "I would much prefer to have my hand of cards than either DirecTV or EchoStar."

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