Any doubts that direct-broadcast satellite-TV providers were pilfering subscribers from cable were put to rest last week, after No. 2 DBS giant EchoStar Communications Corp. reported strong new customer additions while cable continued to bleed basic households.
EchoStar added 340,000 net new subscribers in the second quarter, slightly above analysts’ estimates. The gain came after DirecTV Inc. announced the week before that it had added 455,000 net new customers in the same period.
By contrast, cable has lost a total of 280,000 customers in the quarter, after Charter Communications Inc. said it dropped 58,800 basic subscribers in the period. Cablevision Systems Corp. was the only publicly traded MSO to show a basic subscriber gain — albeit a small one — 7,490 new basic customers in the second quarter.
In the prior week, three major MSOs — Comcast Corp., Time Warner Inc. and Cox Communications Inc. — reported basic-subscriber losses of 96,000, 21,000 and 54,000, respectively. Mediacom Communications Corp. and Insight Communications Co. reported second-quarter basic subscriber losses of 42,000 and 15,500.
In a conference call with analysts, EchoStar chairman Charlie Ergen said that the growth of the DBS sector is only beginning.
“The real focus is cable companies,” Ergen said. “They have 67 million customers. If we’re going to grow our business, we’ve got to get customers, for the most part, from those guys.”
Ergen also said it appears cable retention efforts — mainly dish buyback programs — aren’t working. “Their bounty programs are now at $500 or $600 and they’re still losing subs. Maybe they ought to pay a $1,000 bounty. The consumer is voting with their pocketbook and saying they prefer satellite. I don’t think we’re as good as we’re going to get.”
Still, like DirecTV, Ergen believes that cable operators will push hard to win customers back.
“I don’t think you’re going to see the satellite industry get 800,000 subscribers a quarter without cable reacting to that,” he said, adding that they will likely focus their efforts on video-on-demand, phone services and broadband data.
“It will be interesting to see what strategy they deploy,” Ergen said. “They are clearly on the defensive.”
RATE HIKES HIT
Charter attributed the basic-subscriber losses to a rate increase and normal seasonality during the period when college students return home and snowbirds return to their summer residences.
On a conference call with analysts, Charter CEO Carl Vogel said about 30% to 40% of the basic-subscriber losses were because of seasonality, with the rest due to a 4% to 5% rate increase. Vogel said that second half rate increases should be in the 3% to 5% range.
Those subscriber losses helped drive down cash-flow growth — Charter reported a 1.5% increase in cash flow in the period, the lowest in recent memory. Revenue rose 6% in the period.
Citigroup Smith Barney cable analyst Niraj Gupta estimated cash-flow growth will continue to be anemic at Charter, as the No. 3 U.S. cable company increases marketing spending. Marketing costs in the second quarter rose 29%, which crimped cash flow.
“We expect to see continued aggressive marketing spending from the company for the rest of the year, as the company rolls out voice and other new services such as HDTV and DVRs,” Gupta wrote in a research report. He expects marketing outlays to normalize to about 3% to 4% of revenue.
Vogel said Charter would continue to focus on customers who spend more on advanced services like HDTV and digital video recording.
Charter had about 51,000 HDTV customers in the quarter and the service is available to 2 million customers in its footprint. DVR penetration has tripled since January and Charter will accelerate that rollout to 15 to 20 additional markets by the end of the year.
Stocks took a pounding after the second-quarter reports.
Charter, which also subtracted about 7,200 digital customers in the period, reached a new 52-week low last Wednesday ($2.79), closing at $2.82 per share. The stock dropped to $2.75 per share in early trading Aug. 12, before rallying to $2.88 each.
Cablevision’s basic-subscriber rolls fared better, but the MSO’s stock price plunged after it posted strong operating results last Monday.
Cable TV revenue rose 17%, to $730.4 million, and adjusted operating cash flow was up 24%, to $292.7 million, mainly on strong additions in digital cable, high-speed data and voice subscribers.
Digital customers were up by 110,000, high-speed data by 50,100 and voice by 44,000.
At its Rainbow Media Holdings networks (AMC, Independent Film Channel and WE: Women’s Entertainment), revenue was up 18% to $130 million and adjusted operating cash flow increased 29% to $58 million, primarily because of strong advertising revenue, ratings increases and affiliate revenue increases.
The strong performance forced Cablevision to increase its guidance for the full year. Revenue now is expected to increase between 13% and 15% (instead of 12% to 14%) and adjusted operating cash flow should rise 14% to 16%, instead of 13% to 15%.
Still, the stock fell as low as $16.64 per share (down 75 cents) last Monday, but rallied that same day to close at $16.95, down 44 cents. The shares continued to rise in subsequent trading, closing at $17.74 each on Aug. 12.
Most of the decline in Cablevision stock was due to its Rainbow DBS subsidiary. Although Cablevision said it was on track to spin off the unit — along with its national programming assets — into a separate publicly traded company, Rainbow Media Enterprises, in September, analysts would just rather the DBS service, called Voom, go away.
“We would urge management to shutter Voom and focus its high-definition efforts on its core cable business,” Fulcrum Global Partners analyst Richard Greenfield said in a research note.
Meanwhile, EchoStar surged after its second-quarter results were released, finishing at $29.55 Aug. 10, up $2.29 or 8.4%. The stock closed at $30.42 on Aug. 12. Some of that lift was due to speculation Ergen would attempt to take EchoStar private, along the lines of the Cox Enterprises Inc. offer to take Cox Communications Inc. private for $32 per share.
Ergen, who controls 50.3% of EchoStar’s common stock and more than 90% of the vote, did not want to address that speculation. Instead, he commented on EchoStar’s plan to increase its share buyback plan by $1 billion.