Will Satellite TV’s Growth Run Out Soon?
By Thomas W. Watts
EchoStar Communications [Nasdaq: DISH] and DirecTV have had a fantastic run. In less than 10 years, they have captured 20 million of America’s 100 million TV households. Cable TV, however, is finally fighting back with digital cable and cable modem services. Naysayers claim that satellite’s run is coming to an end. Recent research we carried out suggests cable must do much more than offer more TV and data services. Satellite’s superior customer service and lower prices seem destined to make satellite a superior choice for a long time to come.
We recently interviewed 2,697 households that subscribe to eight cable and satellite providers: AT&T Broadband, Cablevision [NYSE: CVC], Charter [Nasdaq: CHTR], Comcast [Nasdaq: CMCSK], Cox [NYSE: COX], DirecTV, EchoStar’s DISH Network and Time Warner Cable. Three conclusions jumped out of the results:
#1 Satellite subscribers are much more satisfied with their satellite service than cable operators are.
#2 Satellite provides better value for the money than cable.
#3 Satellite provides much better customer service.
#1 When asked about satisfaction with their video provider, 77 per cent of satellite subscribers indicated satisfaction, while only 60 per cent of cable subscribers were satisfied. Narrowing it down to being “very satisfied,” 51 per cent of satellite respondents fell into the superlative category, nearly double the 25 per cent of cable subscribers. We believe convincing those “very satisfied” satellite subscribers to switch to cable will prove quite difficult.
#2 We have cited previous research showing that cable charged $66 monthly for a typical digital cable package, while DirecTV charged 24 per cent less, or $50 for a comparable package, and EchoStar charged 35 per cent less, or $43 for the same package. Those pricing gaps demonstrated their effects in our most recent consumer research – 60 per cent of satellite subscribers were satisfied with the value for money provided by satellite, while only about half as many cable subscribers (33 per cent) had similar satisfaction. The gap widened even further looking at the category “very satisfied with value for the money” – 34 per cent of satellite subscribers were “very satisfied” compared to only 13 percent of cable subscribers.
The gap in pricing between satellite and cable reinforces the difference between the two groups’ strategies. Cable aims to maximize revenue per subscriber, at the cost of giving up subscriber growth. Cable has raised prices every year, typically at a 6 to 7 per cent rate. It has also introduced more and more services to drive up average revenue per user (ARPU). At the same time, cable subscribers have virtually stagnated, growing at a compound rate of only 1.0 per cent over the last five years.
In comparison, satellite has restrained price increases and focused on value for money. This has translated into 20.4 per cent subscriber growth in the last five years and rapid market share gains relative to cable. We expect cable and satellite to continue each of their strategies with similar continuing results, satellite capturing market share, even while cable continues to grow ARPU.
Of course, every subscriber, whether satellite or cable, would like to pay less – 50 per cent of DISH subscribers and 59 per cent of DirecTV subscribers considered their service expensive or very expensive. However, this percentage was much lower than for cable operators, whose “expensive/very expensive” ratings ranged from 77 per cent to 87 per cent.
#3 As a third measure, we looked at satisfaction with customer service. Both DirecTV and DISH Network ranked much higher than any cable operator. This result is similar to the JD Power surveys that rank DirecTV and DISH among the top three video providers every year for customer service. Cable clearly has to improve customer service to increase its share of customers.
Can Satellite Grow Further?
After seeing how much more satisfied satellite customers are, the obvious question arises, “Are more cable subscribers going to switch to satellite?” When asked, 16.3 per cent of cable operators indicated they planned to switch. If we applied that percentage to the roughly 65 million cable subscribers in the United States, that would equate to another 10 million subscribers to satellite.
Of course, the migration is not all one way – 8.2 per cent of satellite subscribers said they planned to switch to cable. That would translate to losses of about 1.6 million subscribers. This suggests net potential gains for satellite of about 8.5 million subscribers. That would push satellite close to 30 million homes, up from today’s 20 million, even without continued 1.5 per cent annual growth. It looks like satellite’s growth run has not yet run out.
(Thomas W. Watts is managing director at New York-based SG Cowen Securities. He can be reached by e-mail at Thomas.WATTS@sgcowen.com)