DBS Turns To Bells For Edge

The two leading direct broadcast satellite (DBS) providers in the United States are responding to competition from cable TV by aligning themselves with the Bell phone companies to provide bundled voice, video and Internet services to their customers.

EchoStar Communications [Nasdaq: DISH] and Hughes Electronics’ [NYSE: GMH] DirecTV are teaming up with Qwest Communications [NYSE: Q] to offer bundled video, voice and high-speed Internet access to Qwest’s residential phone customers in the Western United States. And fellow Bell SBC Communications [NYSE: SBC] is investing $500 million in EchoStar.

But will these alliances prove to be an effective way for either satellite or telephony to compete with cable?

Sources in the satellite, phone and cable industries are mixed about whether the arrangements will bear as much fruit as the companies involved in them aim to produce.

Jim Stroud, a media analyst who heads the Monterey, Calif.-based Blackbird Communications consulting firm, believes that we will see more such deals because they will help satellite TV compete more effectively with cable. At the same time, Stroud wonders if the deals are “coming too late.”

Regional phone companies that offer high-speed DSL and satellite TV service providers share the same enemy – cable. A satellite TV/phone company alliance could market subscription TV, high-speed Internet and voice services that would be comparable to a digital cable package.

DBS/Bell Alliances

As part of the SBC/EchoStar alliance, SBC will market co-branded SBC DISH Network multichannel television services as well as bundled products with one point of contact and a single bill. The two companies will begin work immediately on integrating operations, including order entry, customer service and billing, to offer customers co-branded service in early 2004.

For EchoStar, the arrangement would give the company a new sales and marketing channel for its DISH Network satellite TV service that currently reaches more than 8.5 million customers nationwide. For SBC, the deal fulfills its long-term strategic objective to integrate television entertainment into its other services for a modest investment.

The partnership will provide SBC with an exclusive telecom partnership with EchoStar for single-family residences throughout the SBC 13-state service area – Arkansas, California, Connecticut, Illinois, Indiana, Kansas, Michigan, Missouri, Nevada, Ohio, Oklahoma, Texas and Wisconsin – where it provides service to more than 56 million access lines.

The agreement furthers SBC’s strategy of delivering value and spurring growth through bundled services, its officials said. The deal with EchoStar follows previous SBC moves into the long-distance market and in expanding its DSL high-speed Internet access service.

SBC and EchoStar pledged to develop technology that combines the function necessary to receive DISH Network satellite television, DSL Internet and home networking, as well as ways for consumers to access SBC DISH Network bundled services.

Denver-based Qwest took a more limited approach last week by signing strategic marketing agreements with both EchoStar and DirecTV to make satellite TV services available to customers in single family homes in Qwest’s residential phone market. Qwest’s agreement with EchoStar covers Colorado and Nebraska, while the one with DirecTV covers Arizona and Washington. Qwest will roll out bundled services throughout the remainder of 2003 and into 2004, company officials said.

Unlike SBC, Qwest did not make a financial investment in either of its DBS partners. Qwest and the DBS are also exploring ways to add next-generation services, as well as to migrate to a more integrated model in the first half of 2004. Qwest will handle the key customer service role for one-stop service and billing.

For Whom the Bells Toll

Despite the moves last week by SBC and Qwest, the other regional Bells are not willing to take the bundled plunge. Both New York-based Verizon [NYSE: VZ] and Atlanta-based BellSouth [NYSE: BLS] are exploring the use of non-satellite technologies to provide entertainment services to their customers.

Jim Smith, a Verizon spokesman, said his company is “very satisfied” with its competitive position that currently bundles local, regional and long distance phone service, dial- up and high-speed Internet access, and wireless phone service.

“That stack [of services] attacks all the communications needs of a normal customer. Entertainment is the outlier, as far as we can tell,” Smith said. On the other hand, Verizon is not “ruling out” the possibility of competing with bundled services that include entertainment. For now, company officials see no competitive advantage to adding entertainment to its existing bundled services.

Verizon has announced plans to start installing fiber-optic links to the home, Smith said. Fiber would have “phenomenal capacity” to provide the quality and depth of capability that a cable company offers. “However, that is not in our business plan at this time,” Smith said.

Jeff Battcher, BellSouth’s director of corporate communications, said his company’s focus has been on deploying fiber in newly developed areas in its nine-state Southeast service area.

BellSouth had problems delivering a wireless video service in the past and opted to transition those customers to the EchoStar’s DISH network. Those customers now are EchoStar subscribers and BellSouth no longer has a business relationship with them. “That is the start and the stop of our current relationship with EchoStar,” he explained.

BellSouth has not settled on what would be the best way to deliver entertainment to its customers. “We still provide 65,000 customers with entertainment service in Atlanta and South Florida through fiber,” Battcher said. “That arrangement has been in place for two-and-a-half years now. BellSouth has more fiber rolled out than any other [Bell company].”

BellSouth likely will continue its “mosaic approach” to providing entertainment through various technologies.

Financial Analysis

Wall Street analysts that follow the satellite industry generally viewed the relationship between DBS and regional phone service as a reasonable way for both sectors to compete with cable’s bundled services. Whether the alliances become successes is another question.

Tom Watts, a New York-based analyst with SG Cowen, said that the “deals certainly give telcos a better bundle to respond to cable’s bundled offering of video, data and voice. The lower pricing of DSL versus cable modem, plus the lower pricing of satellite versus cable video offerings, should bring real value to customers.”

Certain consumers are more likely to subscribe to satellite services if they can buy it through their local phone company rather than having to go to Circuit City [NYSE: CC] or Best Buy [NYSE: BBY], Watts said. Even without the bundling deals, consumers are continuing to show a clear preference for satellite over cable, he added.

New York-based AOL Time Warner’s [NYSE: AOL] second quarter results released last week show that the company’s cable subscriber base grew only 0.9 percent, year-over-year, roughly the same growth rate of cable for the last five years, Watts said. During the identical period, satellite grew roughly 20 percent per year.

Benjamin Swinburne, a New York-based satellite analyst at Morgan Stanley, said that the success of the SBC/EchoStar co-branding alliance would depend on back office integration of billing, order management and customer care. A previous SBC/EchoStar marketing arrangement had “very limited success,” he added.

The impetus for SBC and other regional phone companies to pursue such bundled services now is that cable TV operators are expected to be ready to introduce IP telephony in the 2004-2005 period, Swinburne said.

Karim Zia, a New York-based analyst with Deutsche Bank, said last week that he viewed the SBC/EchoStar partnership as the first of many arrangements between the Bells and DBS.

Alternative Views

Jimmy Schaeffler, a satellite market analyst who heads The Carmel Group, wondered whether satellite operators can maintain their quality image, while ceding “so much control” over marketing and customer service to regional phone companies. EchoStar’s deal with SBC also raises the issue of whether EchoStar chief Charlie Ergen would be interested in selling his company to a Bell.

“These partnerships will require intelligent marketing and operation tactics and true cooperation to build awareness and service the customer, not just a $5 off coupon,” said Bruce Leichtman, a satellite and cable analyst who heads Durham, N.H.-based Leichtman Research Group. “The key is to help attract new movers who represent the true ‘jump ball’ and create packages that provide ‘glue,’ giving consumers less reason to switch.”

Andy Wright, president of the Alexandria, Va.-based Satellite Broadcasting and Communications Association, said consumers will be the “big winners” from last week’s alliances by benefiting from robust packages that will ease access to both television and phone services.

“These announcements are concrete examples of how the DBS industry will effectively compete with the bundled offerings of the cable giants and provide services that add fuel to our growth,” Wright said.

Steve Effros, president of the Fairfax, Va.-based Effros Communications cable TV consultancy, countered that satellite TV and phone service providers have worked together in the past without much success. He does not expect the alliances announced last week to be any different.

“SBC has sold off or closed down every video effort that it has undertaken in the past. Even a donkey doesn’t trip over the same stone twice. I expect this is another one of the grand pronouncements that will not fulfill its promises,” Effros said.

One peculiarity of the EchoStar/SBC deal is that it would make SBC, an unproven seller of video services, the marketer of the co-branded service with EchoStar in 13 states, Effros said. EchoStar arguably is the best marketer of U.S. satellite TV services, based on its faster subscriber growth compared with rival DirecTV that focuses on enticing higher-end customers.

One incentive for EchoStar to participate in the arrangement is SBC’s commitment to provide $500 million in financing to the satellite TV services provider.

“If Charlie [Ergen] is going to cede the marketing to SBC, it is great for cable,” Effros said. “If SBC will offer a bundled service, who will do the install?” If SBC employees perform the installations, the arrangement with EchoStar may not be a smooth one. With digital cable, installations involve one truck and one person for all bundled services, he added.

“Is the telephone guy going to go on the roof and install the satellite dish? I don’t think this is going to create a major dislocation in the market between satellite and cable. If history is my guide, I don’t have to lose too much sleep if I’m a cable person,” Effros said.

The arrangement with SBC is not risk-free for EchoStar. “Customer satisfaction level is high for satellite TV but when you bundle video with other services, it could pose potential problems,” he added. –Paul Dykewicz

(Larry Solomon, SBC Communications, 210/351-3990; Marc Lumpkin, EchoStar, 303/723-2020; Jim Stroud, Blackbird Communications, 831/384-6898; Jim Smith, Verizon, 212/395-7746; Jeff Battcher, BellSouth, 404/249-2793;Tom Watts, SG Cowen, 212/278-4260; Benjamin Swinburne, Morgan Stanley, 212/761-7527; Karim Zia, Deutsche Bank, 212/250-7591; Jimmy Schaeffler, The Carmel Group, 831/643-2222; Bruce Leichtman, Leichtman Research Group, 603/397-5400; Steve Effros, Effros Communications, 703/631-2099; Andy Wright, SBCA, 703/739- 8376)

Leichtman’s Observations:

• The cable “triple play” of offering video, voice and broadband services currently is overplayed. So far, only 2.275 million people receive phone service from their cable company.
• Where cable is doing very well is with the “double play” of digital cable and high-speed Internet.
• Only two Bell companies are dancing with satellite partners. BellSouth and Verizon have yet to commit.
• Partnerships between DBS and Bells have occurred before and with little success. One example is DirecTV and AT&T.

Source: Bruce Leichtman, Leichtman Research Group