Subscriber Bases: Quantity Or Quality
The average consumer may not be familiar with the phrase average revenue per user, but they definitely buy into the business strategy. Pay-TV was one of the first mediums to embrace the idea of replacing a large quantity of subscribers with a smaller number of quality subscribers willing to spend more money. Now it appears the consumer satellite market is heading down that same path.
Home Box Office, which has become known for creating high-quality drama series like The Sopranos, was among the first companies to try and lure viewers willing to pay more for premium services. Viewers get hooked on the extras and the channel can exist on a comparatively small number of subscribers who pay an extra $12 per month, in addition to their basic cable or satellite-TV bill. Cellular operators also have built subscriber acquisition strategies around higher-cost services such as text messaging, family calling plans and other offerings.
A successful subscriber acquisition strategy is one with a high average revenue per user, or ARPU, analysts say. The reason is simple: A company increases its revenue while holding down costs and maintaining efficiency by having fewer customers. But, companies have to offer higher-rate services to get a higher ARPU and that is not so easy, says Max Engel of Frost & Sullivan. “It becomes a trade-off. You have to invest and do a lot of things to get to those services,” he says.
The best example of increasing costs to get to higher ARPU is in the cell phone sector, says Engel. After companies saturate the market with a basic product or service — like a simple cell phone with basic service — it becomes harder to add subscribers.
Companies experience higher turnover, or churn, of customers when they try to saturate the market with basic products and services. Like cell phone providers, premium cable channels and now DirecTV have discovered, they can reduce churn and build loyalty — and ARPU — with high-end offerings, but as customers pay more for service, they also demand more, he says. “As the ARPU goes up, the implied value goes up and the stickiness of the relationship goes up,” Engel says. So, now in the cell phone market, “companies need to do more than say, ‘You can buy a cell phone from me.’”
That scenario applies directly to the direct-to-home satellite model — DirecTV and EchoStar — and to the satellite broadband model — Hughes Network Services and WildBlue, he says. “The video market has reached that level of saturation and is struggling with many of the same issues as the cell phone companies,” says Engel. “The question of strategy is the great divide and it’s terribly important. Satellite video has crossed that divide and once you get to that world where higher ARPUs is what you’re going after, that means you are trying to keep your customers.”
Although he believes companies have to go after higher ARPU, Engel warns there is a downside: “The real danger with higher ARPU is that you’ll get commoditized and the ARPU will fall through the floor. That’s why cell phones got text messaging and this and that,” he says. “It wasn’t really to raise the ARPU, which takes a very long time. The ARPU model is not just about getting more money; it’s about getting more desirable service with loyal customers.”
Satellite Pay-TV Leads Way
The leader in satellite’s trend toward higher-paying subscribers is TV and, specifically, DirecTV, analysts say. DirecTV is expected by October to offer nearly 100 channels of national high-definition (HD) channels as well as local HD channels in 75 percent of the United States. By March, DirecTV plans to ramp up to 150 channels of national HD, with local coverage reaching 90 percent of the country, according to a July report by Steve Mather, vice president of equity research for SMH Capital in Los Angeles.
DirecTV spokesman Robert Mercer says the company continues to expand its advanced products line of HD and digital video recorders in the hopes of adding “more quality customers.” Mercer notes that the strategy generates higher revenue and lower churn, or loss of customers, and DirecTV posted its lowest churn rate in three years in the first quarter of this year. Several years ago, DirecTV tightened its credit policies and dealer incentives, which “had an impact” on its gross subscriber acquisition numbers but, Mercer says, “had a decidedly positive effect on the number of quality, credit-worthy customers we were acquiring. That lowered our churn rate while improving financial returns.”
EchoStar is known for keeping quiet about strategic plans and officials declined to comment for this story, but analysts say EchoStar seems to remain focused on growing its base of basic service subscribers. EchoStar is adding subscribers and ARPU, although “their path is not as clear as DirecTV,” Mather says. Still, “They’ll keep increasing profits. They’re crafty and they’ll find a way,” he says.
“DirecTV gets significantly higher revenue per subscriber,” says Roger Rusch, president of TelAstra in Palos Verdes, Calif. “EchoStar goes after the consumer who is a little tighter with their money, … [but] both models work because both companies are doing well.”
Both operators also are exploring options to leverage their subscriber bases with HD, broadband and digital video recorders “to grow 2007 revenues to $16.8 billion [for DirecTV] and $11.3 billion” for EchoStar,” says Mather. The market is ripe for growth. While only 8 percent of Americans have HDTV service, 28 percent have HD compatible TVs, he says. Cable is in 65 percent of homes — compared to satellite’s 27 percent — and cable providers are adding HD, as well, but they will be second to DirecTV, says Mather. Cable has not added subscribers in several years and their penetration rate is declining because of satellite, which is cheaper, he says.
If U.S.-based operators want to see a consumer retention strategy in its advanced stage, they can look internationally, especially to the United Kingdom, where BSkyB has been particularly progressive in moving away from its satellite pay-TV roots to generate even more revenue from its subscribers. In October 2005, BSkyB acquired telecoms operator Easynet, allowing BSkyB to bundle satellite pay-TV, broadband and telephony in a single package for subscribers. This triple-play strategy is taking away one of cable’s natural competitive advantages. BSkyB also has deals in place with Vodafone where subscribers can pay for mobile TV bouquets e through Vodafone’s 3G cellular service.
Newer Services Still Focusing On Building Bases
In the satellite radio market, there is little difference in subscriber acquisition models and it seems both Sirius Satellite Radio and XM Satellite Radio are still trying to grow their base, says Rusch. Both have built business mostly from partnerships with automakers and by creating attractive content. XM for years offered service for $10 per month while Sirius offered a monthly rate of $13. Now both are at $13 per month, says Rusch. The two companies are seeking U.S. government approval to merge, and neither would comment for this article.
While analysts agree that satellite radio has secured its place in the market, they also say that XM and Sirius are sliding in profits and subscriber acquisition expectations. In his July report, Mather dropped XM and Sirius’ projected 2010 subscribers from a range of 18 million to 20 million to a range of 15 million to 17 million and noted that profits have been disappointing.
The mainstay of success for XM and Sirius has been in their partnerships with automakers. Again, the cellular phone business has been the model, says Rusch. “It started in cars, too. People have followed the model in these satellite ventures. They want a car dealer to get something for helping them and it is becoming a standard option,” he says. But until satellite radio is available in every vehicle, XM and Sirius will have to be creative in increasing their ARPUs, says Rusch.
In the satellite broadband market, subscriber acquisition seems still to be in the build-the-base strategy, as the only two providers of satellite-only broadband — Hughes Network Services and WildBlue — compete for largely different sectors of a market that is much higher on demand than supply. Hughes held the satellite broadband market for years when WildBlue entered the arena in June 2005. WildBlue has grown quickly, now with 200,000 subscribers to Hughes’ 350,000, but while Hughes competes with telcos for all sectors and locations of broadband, WildBlue is focused on providing high-speed Internet to homes so rural that there is no other option for broadband. The demand is so much greater than supply, Hughes officials have said, that they have not felt the encroachment of WildBlue into their customer base.
WildBlue executives believe there are as many as 20 million potential customers who fit its rural, no-access profile. That’s more than enough to be profitable for at least five to seven years, says Engel. “Even if there are only 5 million, that’s still good business,” he says.
The terrestrial Internet providers can offer service at far lower prices than the average satellite price, which is why WildBlue insists on targeting customers it thinks will not get other options through telcos and cable. “The biggest enemy to a subscription service like ours is churn,” says WildBlue President and COO Ken Carroll. The biggest reason for churn, overall, is relocation. WildBlue is at advantage because there is less relocation in rural areas, leaving its biggest reason for churn the influx of digital subscriber lines or cable broadband.
“We’ll sell our service to anybody, but we’re not looking to sign up customers who have cable modem service available because our price points are above that and they have other options,” says Carroll. “… We’re growing at a pretty fast clip. I don’t think we have a target number, but as we get larger we will get certain economies of scale. … At this point, we’re focused on the blocking/tackling of satellite broadband and we’ll stay focused on that for some time,” he says.
WildBlue’s strategy of focusing on customers with no connection makes sense, says Rusch. They “are willing to accept slightly higher cost and lower quality because they have nothing else.” But Rusch predicts that after the saturation of its target market WildBlue will have to change strategies. “I’ve warned them that there is a danger in that model and it’s an issue of fairness. These people are not hicks. They just tend to be less affluent. They know what other people are getting for their technology and they want the same,” he says.
It is unclear how quickly satellite service providers in the consumer market will follow DirecTV in targeting fewer but higher quality subscribers. While it is always tempting to claim the most customers, analysts say, satellite providers are entering a level of maturity where less means more.
“A high number of subscribers is a good way to prove you’re doing well,” but in the long term, Engel says, “there is no choice” but to go after higher ARPU. “Once you get a saturated market, there are only three ways to get revenue: you get more customers, you charge more of each customer or you get the government to subsidize you.” Most analysts are betting on the second option.