DTH Providers Seek Alternate Revenue Streams

By | January 1, 2008 | Broadcasting, Feature

With cable and IPTV players putting more pressure on satellite pay-TV providers around the globe, the satellite operators are looking to move beyond their traditional business boundaries. Direct-to- home (DTH) operators in the United Kingdom and United States are leading the way in areas such as broadband services and traditional broadcast offerings, and other DTH players worldwide could soon look to implement more diverse and multi-faceted strategies in order to remain competitive.

In the space of 24 hours in October, BSkyB announced it had reached 1 million broadband subscribers in the United Kingdom, and EchoStar unveiled its new ViP-TV service, through which EchoStar has the ability to transport more than 300 channels of programming via satellite to telcos, private and rural cable operators, municipalities, and master-planned community video providers. These moves indicate that satellite pay-TV operators are looking at new and diverse revenue streams to stay ahead of the competition.

EchoStar

EchoStar has one of the most expansive strategies of any satellite pay-TV operator around the globe. As well as having its own fixed satellite services (FSS) division, the operator recently acquired Sling Media to enhance set-top box capabilities. EchoStar also plans to split itself into two divisions: a subscription business and an infrastructure business.

The separation of retail and FSS business will help EchoStar better manage two lines of business with distinct characteristics while also allowing the company to better package its retail division for a potential acquisition by AT&T, says Carlos Placido, a media analyst at NSR. “The ViP-TV offering targets small, [capital expenditure]-limited rural telcos and cable operators via an [operating expenditure]-for-[capital expenditure] value proposition. By entering satellite IPTV, EchoStar places itself in competition with SES IP-Prime and Avail Media-Intelsat IPTV offerings. This is an area that now looks congested, but we do not think EchoStar is late to the game because the takeup for these services have been slower than expected. Despite its rain sensitive Ku-band play, EchoStar counts with strong advantages as it relates to an extensive HD (high definition)/SD (standard definition) line-up and programming rights including local channels in major markets,” he says.

“EchoStar has looked to split into two pieces, one being a wholesaler, one being a retailer,” says Tom Eagan, a satellite equity analyst at Oppenheimer. The wholesale side “is probably the more notable of the two. Charlie Ergen, EchoStar’s CEO, has spoken before about manufacturing a couple of extra satellites for wholesale capacity. He thinks with the increase of HD creation for cable networks, there will be increased demand for HD transmission, therefore increased wholesale satellite demand.”

The acquisition of Sling Media hints at a more convergent strategy going forward, says Ben Swinburne, a media equity analyst at Morgan Stanley. “I think over the long term, convergence of online IP video and traditional broadcast television is inevitable,” he says “… EchoStar’s recent acquisition of Sling Media puts it in the driver’s seat towards true television viewing portability by controlling the software interface rather than the actual high-speed connection. My guess is EchoStar integrates Sling into its existing Dish Network set-tops, offering a real differentiating IP-based video product that immediately leapfrogs the cable and telco operators that control the IP connection into the home.”

But Swinburne is not sure how valuable the FSS side of the business is to EchoStar. “FSS is a bit of a black box for the financial community analyzing EchoStar, mainly because it is very difficult to assess how much excess capacity really exists in the EchoStar fleet,” he says. “Given the growing need for HD capacity and the important of picture quality — particularly as Fios gains footprint, my guess is that there this is a somewhat modest revenue opportunity for Dish in the near term.”

Broadband Tougher Sell In United States

While BSkyB is making great strides with its broadband offering in the United Kingdom, the impact of broadband on satellite pay-TV  players in the United States is more difficult to judge, says Todd Mitchell, a media equity analyst at Kaufman Brothers,

DirecTV’s change in ownership from News Corp. to Liberty Global could impact its strategy. “I think John Malone (Liberty Global chairman) will use the platform to build up the stable of content,” says Mitchell. “It is not so much content that needs to be delivered real-time compared to [News Corp. CEO] Rupert Murdoch. Malone does not need to own the other components of the triple play. I think what his strategy will be is to push as many DVRs [digital video recorders] as possible and partner with wireline operators to get a return channel. I think the expansive strategy that Murdoch had for DirecTV has now been pulled back in. At the same time, EchoStar has used this disruption at DirecTV to be extremely aggressive in going after new subscribers but also looking forward into what is the technology and what are the distribution mechanisms that we need to have a much more robust two-way offering in the future.”

DirecTV has not been standing still, signing  a wholesale distribution agreement in August with Current Group in order to offer customers Current’s BPL (Broadband Over Powerline) high-speed Internet service and Voice Over IP services beginning of 2008.

Swinburne believes both DirecTV and EchoStar will continue to deploy more diverse strategies. “I think both companies — particularly following the Liberty-News swap — will look to evolve their businesses,” he says. “Clearly EchoStar is looking at technology bets in the U.S. and new international opportunities particularly in Asia. In contrast to EchoStar, I see DirecTV looking more at content as a diversification strategy, given John Malone’s background and growing influence. I also am very bullish on DirecTV’s Latin America operations, which just three or four years ago was in bankruptcy. The market rationalization during the News Corp. ownership was significant and assuming the local economies hold up, there should be impressing growth in these assets.”

While diversifying seems to be necessary, Placido believes there are issues the satellite players must address in order to be effective. “We believe that looking forward, DTH players will be actively involved in hybrid triple-play offerings, although not necessarily by becoming triple-play operators themselves,” he says. “Per-platform competition borders are disappearing as service bundling takes place in an increasingly technology-agnostic way. The dilemma is that satellite’s broadcast characteristics, which make DTH so operationally efficient for TV distribution across wide extensions, work against them when it comes to competitively priced personal one-to-one communications and entertainment. As such, addressing two-way broadband needs in all areas necessarily implies the use of complementary last-mile broadband technologies,” he says.

Jimmy Schaeffler, president of the Carmel Group, believes the evolution of DTH operators in the United States already is taking place. “DTH operators must have triple-play services and possibly even quadruple-play services in order to compete effectively against cable and telco rivals. In fact, you could say that video, data and voice services have become prerequisites for participation the triple-play multichannel pay-TV platform. Additionally, advanced interactive multimedia services come into play. These services are an important part of the evolution of DTH, as well. It’s not unrealistic to predict that new features and services like DVRs, VOD , mobile TV, interactive TV and home networking are going to make greater headway into millions of U.S. homes and eventually global homes.”

In the next two years, DTH providers need to continue investing in emerging technologies and applications that help differentiate DTH from the competition, says Schaeffler. “We’ve seen EchoStar acquire Sling Media and DirecTV introduce a mobile platform. Sure, neither is a killer app, but it’s more of that building an [advanced interactive multimedia] edge over rivals that makes a big difference down the road. We also see IP becoming an alternative route to push content down to subscribers, so expect to see more hybrid-type services in that arena.”

Europe

In Europe, Telenor and BSkyB have perhaps the most interesting strategies in terms of expanding beyond traditional subscription pay-TV services. Telenor, which owns the Canal Digital pay-TV platform, also owns broadcast satellites through its subsidiary, Telenor Satellite Broadcasting (TSB). Cato Halsaa, CEO of TSB believes having satellite assets is a major competitive advantage. “We are still one of the few telcos that has a broadcast arm,” he says. “For Telenor, it is becoming more and more obvious that this is a strategic advantage. As content is becoming increasingly important for things like mobile and that is where the link is. There is a strategic link between the mobile and broadcast business. This has grown in importance in the last period. From a satellite perspective, there are numerous opportunities. Firstly, you have services in the Nordic region. There is HD as well as more channels coming from present customers. There is also significant growth in emerging European markets. We are well-placed to serve those as well as provide the associate ground services such as uplinking and fiber networking.”

The broadcast solutions business has generated double-digit revenue growth annually, and TSB expects that to continue. “With the analog/digital conversion, we are confident about future revenue growth,” Halsaa says. “Broadcast is the main driver for that growth. We believe the market positioning we have with 1 degree West and a wide range of end-to-end solutions makes us confident we can continue this growth.”

To capitalize on this Telenor is embarking on an aggressive capital expenditure plan to develop a pair of broadcasting satellites — Thor 5 and Thor 6 — to expand its capacity and also has signed for Intelsat to purchase 10 transponders on Thor 6. “We are replacing Thor 2 and Thor 3 with more transponders on both of the new satellites,” says Halsaa. “We will increase our capacity from 40 to 70 transponders when the satellite replacement program has completed. We have also moved up the replacement of Thor 3 one year in order to have more security and use the replacement satellite, in case we have any launch failures. These investments are expected to continue to deliver growth. With our close corporation with Canal Digital, we have developed 1 degree West into a very strong Nordic position, but now with our corporation with Intelsat, 1 degree West has now become a major player in central Europe.”

BSkyB may not own satellites but still has one of the most intriguing strategies of any satellite pay-TV operator. BSkyB also has acquired a hardware vendor, Amstrad, which BSkyB  believes will bring a number of benefits, including an in-house design and development capability, an ability to accelerate the development of new and more innovative products for customers, and greater control over product design and technical specifications. BSkyB also expects to realize a significant reduction in procurement costs within its supply chain as margin generated by Amstrad on the supply of equipment to the Sky Group will be retained within the Sky business.

With multiple devices throughout the home now demanding content, BSkyB also expects the demands for bandwidth in a traditional family home to skyrocket, says Stephen Nuttall, BSkyB’s group director of business development. “You can imagine that a (family) household needs well in excess of 100 Mbps (megabits per second) for video. That will go up. It is a heck of a challenge to deliver that on a one-to-one basis, because the line from the exchange to my house cannot sustain 100 Mbps.”

Combining the strengths of satellite and IP could well be the best way to serve customers going forward. “There is clearly a need for the one-to-one IP pipe, but we think that is best suited for communications needs and also for accessing the long tail of video programming, so not the most popular video content,” he says. “So the Sky model in the future combines local storage in your Sky+ or your PC with satellite delivery for the most popular content and an IP pipe for the more niche content and communications. We think that is a better answer than trying to do everything over IP.”

Bottom Line

What we have seen throughout the last year is traditional DTH operators are looking beyond their base subscription pay-TV business. With average revenues per user from that service maxing out, operators are looking at new ways to generate business. Who would havethought a few years ago, we would see companies like EchoStar and BSkyB make the acquisitions they have and diversify to the extremes they have?

“I don’t see the FSS side as a main investment driver for EchoStar, but I think it is interesting if you look at the IPTV infrastructure and the FSS infrastructure,” says Mitchell. “If you look at Sling Media, what they are really looking to do here is a real ubiquity play. The ability to deliver EchoStar purchased and re-purposed content anywhere. I think if you look at the BSkyB model and the move towards a DBS-IPTV architecture, I think in general the large DTH players are going in that direction.”

The question is we can expect satellite pay-TV operators to look for a more all-encompassing role within the broadcast environment. It is no longer just a case of offering subscription TV services. There are a number of new opportunities for players and already the most innovative satellite pay-TV operators are expanding beyond their roots and looking to integrate their core satellite business with other opportunities. We can expect this trend to continue as satellite tries to retain the hard-earned competitive advantage it has gained in most markets.

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