DBS: “SLOWING SUBS GROWTH”

By | July 18, 2001 | Feature

Chris Forrester, Editor

A July 3 report from Merrill Lynch talks of US pay-TV DBS stocks being undervalued “as they do not properly reflect the operating leverage of their satellite assets and the cash-flow growth that awaits as a result of their significant subscriber basses.” While this comment could be looked on as a favourable statement, Merrill Lynch nevertheless has decreased its long-term DBS forecasts by one million, from 26 million DBS subscribers to 25 million in 2007. This still represents a 22 per cent penetration rate of US TV Households.

The adjustment also reflects a continuing shift in market share, with Echostar predicted to enjoy a 43 per cent share of the DBS market, up from 42 per cent, in 2007.

A healthy growth rate in ARPU is also predicted, up from last year’s DBS industry average of $55.01, to $75.14 by the end of 2006. Merrill Lynch says this increase in monthly income will come about by higher PPV take-up rates, extra revenue from Personal Video Recorders, extra data/interactive applications plus the effect of inflation. Tied in with this ARPU growth, the report predicts an improvement in customer retention, adding: “our analysis concludes that churn has the greatest effect on not just net subscriber additions, but ultimately EBITDA.”

Even though these past days have seemed to signal the DirecTV/Hughes and News Corp merger as coming closer together, Merrill Lynch says the rival Echostar bid for DirecTV represents a “positive alternative for Hughes and Echostar shareholders.” Further, report author Marc Nabi and his team suggest that a result where DirecTV and Echostar merge would be in a better position to compete with CATV as well as benefit from lower programming costs, lower fixed costs and other savings as a result of the merger and better in- orbit utilisation.

If Rupert Murdoch wins DirecTV there are also positive benefits, says Nabi, with a seamless vertical integration within his global empire of studios, Fox Networks, Internet, print and related media. Nabi says meaningful programming cost savings will be achieved thanks to Murdoch’s “unparalleled” satellite distribution business, with potentially valuable exclusivity of certain broadcast events. Either way, says the report, the regulators will want their two cents-worth of examination, probably leading to a further 6-12 months delay. During this time GM will not receive the reported $5 billion in cash it is seeking until the deal finally closes.

US DBS ARPU* ($/month)
2000
2001E
2002E
2003E
2004E
2005E
2006E
55.01
57.61
60.88
64.14
67.73
71.18
75.14
Data: Merrill Lynch equity research, July 2001


US DBS Numbers (m)*

2000
2001E
2002E
2003E
2004E
2005E
2006E
2007E
DirecTV
9.508
10.759
11.832
12.608
13.119
13.497
13.794
14.038
Echostar
5.260
6.862
8.143
9.008
9.561
9.973
10.298
10.567
TOTAL
14.768
17.621
19.975
21.616
22.680
23.470
24.092
24.605
Data: Merrill Lynch equity research, July 2001

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