Technical Innovations Drive Competition
By Jimmy Schaeffler
DirecTV and EchoStar Communications [Nasdaq: DISH] have enjoyed rising stock prices, despite intense competition from cable TV. Just prior to last week’s National Cable & Telecommunications Association (NCTA) conference in Chicago, cable’s focus was clearly on “execution and delivery of services,” according to NCTA President Robert Sachs. “Mergers and acquisitions” no longer are at the forefront of the cable industry’s plans.
In addition, both cable and satellite TV continue to pursue new technical applications aggressively. These new services are critical because of two factors: 1) enhancing average revenue per unit (ARPU) and 2) reducing churn by building loyalty – and stickiness — among subscribers.
HDTV, VOD and Modems
The exhibit hall at Chicago’s McCormick Center reflected three key trends during last week’s NCTA show. One was cable’s passion for high-definition TV (HDTV). Indeed, the cable industry feels that HDTV is the most important card it will be playing to trump satellite in the marketplace. Cable has coined the phrase “digital revolution” and the NCTA drove home the point by making it the conference’s title and theme. Numerous booths and displays on and off the show floor highlighted something that the cable industry has not seen for some time: new technology that is not just “planned,” but actually on display and deployed.
Starz Encore’s John Sie and his team unveiled their own vision of HDTV. Starz Encore’s advanced services now include subscription video-on-demand (SVOD) together with HDTV. So far, only satellite can deliver HDTV ubiquitously nationwide. That capability is something that cable may never be able to do. For this reason and others described below, direct broadcast satellite (DBS) retains a slight advantage for the remainder of 2003, at least in the battle for HDTV subscribers.
Internet and Broadband
A second advanced service the cable industry emphasized at NCTA was cable modems and their ability to deliver broadband services. With larger cable systems upgrading to 550 MHz or more, today’s digital cable services are capable of doing what only one competitor (i.e., telephone companies via digital subscriber lines (DSL)) can do today: deliver high- speed Internet and telephony services. In addition, cable is able to add one more flower to this bouquet: video and audio. Thus, the “beautiful bundled bouquet” cable offers gives the technology a huge advantage over satellite going forward, despite satellite’s edge in just about every other competitive area.
DVRs And VOD
The final area of emphasis at NCTA was digital video recorders (DVRs) and VOD. In this battle, DBS again has the advantage over cable. This is because both DBS companies can offer DVRs across the landscape of more than 100-plus million TV households (TVHHs). Additionally, DVRs avoid many of the copyright and digital rights management issues encountered by VOD. Further down the line, this DVR advantage for DBS may shift. Hollywood and New York City content providers may well fight consumers’ copying entertainment and sports programming for free.
DBS’ Other Plusses
A recent study by The Carmel Group addressed the strengths and weaknesses of both DBS and cable. The analysis found that DBS beats cable in eight of nine areas. The one area where DBS needs to play catch-up in the next two to five years is in bundling of services. The key in this area, as noted above, is cable’s ability to bundle video/audio, telephone and Internet/broadband service on one and two-way lines. Nonetheless, the eight other areas where DBS retains its lead are customer service, financials, marketing, distribution, programming, advanced services (other than bundled services), price and executive management skills.
And The Numbers, Please…
After closing the first quarter with 11.42 million total subscribers, Hughes Electronics’ [NYSE: GMH] subsidiary DirecTV added an estimated 76,000 net new subscribers in April and an estimated 79,000 net new subscribers in May. On this track, DirecTV will close the second quarter with an estimated 11.7 million subscribers. DirecTV’s total for the year-to-date comes in at 430,000 net new subscribers, based on The Carmel Group’s estimates. DirecTV is headed for another hot year, bringing in a solid share of the total 2.4 million net new subscribers we estimate will be added by the U.S. DBS industry for all of 2003.
EchoStar is estimated to have closed the first quarter with 8.53 million total subscribers. Those estimates include 92,000 net new subscribers in April and 95,000 net new subscribers in May. At the end of May, EchoStar had amassed an estimated 8.7 million total subscribers. EchoStar’s total for the year thus far comes in at 537,000 net new subscribers, according to The Carmel Group’s estimates.
Together, the two DBS providers today serve an estimated 20.3 million subscribers. The 20-million milestone likely was passed in April. At the end of March, EchoStar held an estimated 43 percent of the U.S. DBS market share, with DirecTV accounts for the remaining 57 percent. The Carmel Group projects DBS will reach the magic 30-million subscriber mark sometime in the 2008-2009 time frame.
Both providers together added 625,000 net new subscribers during the first quarter and an estimated 168,000 net new subscribers in April. They further combined for an estimated gain of 175,000 new subscribers in May.
At this pace, The Carmel Group estimates the two companies will record well above 2 million net new subscribers for the year. This compares well with prior years and suggests that cable providers will need to look back over their shoulders at the oncoming competition. The answer for those cable guys is – Keep doing what you do better, and emphasize “the bundle.”
Jimmy Schaeffler researches, analyzes and writes this monthly report. He is a subscription TV analyst at The Carmel Group, a publisher of industry databooks and the monthly newsletters DBS Investor and Satellite Radio Investor, and a consultancy based in Carmel-by-the-Sea, Calif. (http://www.carmelgroup.com). The company specializes in telecommunications (e.g., cable, satellite, broadcast and wireless), as well as computers and the media. He can be reached by e-mail, , or by telephone, 831/643 2222.