EchoStar Uses DVRs To Gain Edge

EchoStar Communications [Nasdaq: DISH] is raising the stakes in its bid to entice new subscribers by becoming the first pay-TV services provider to offer digital video recorders (DVRs) at no charge.

The Littleton, Colo.-based satellite TV operator is kicking off its promotion with the rollout of a new model of its DISH Player DVR. EchoStar’s DVR 510, a combination satellite TV receiver and DVR, also will give subscribers access to a new video on demand service.

Industry analysts praised EchoStar’s aggressiveness in laying down a competitive challenge to its satellite TV and cable rivals. The reasoning is that EchoStar likely will be able to use the DVR service to lure upscale subscribers who are less likely to switch service providers.

Vijay Jayant, a satellite analyst with Lehman Brothers, supported EchoStar’s plan to absorb initial equipment costs for a guaranteed monthly revenue stream.

“We think DVRs are proving to be a key competitive tool to combat subscriber churn,” Jayant said. Since the churn rate for DVR customers is half that of other subscribers, EchoStar should be able to boost its retention rates.

While the subscriber acquisition costs are higher for DVR customers, the reduced churn rate and increased monthly revenues per subscriber would generate a higher internal rate of return from each subscriber, Jayant explained.

DVRs eventually will become a “staple satellite product” if offered on attractive terms to subscribers through simplified marketing campaigns, Jayant said.

“EchoStar is staying [on] the path of aggressive subscriber growth in a maturing video marketplace,” said Marc Nabi, a Merrill Lynch satellite and broadcasting analyst.

EchoStar CEO Charlie Ergen understands the unit economics of adding additional subscribers to an existing point-to-multipoint satellite platform, Nabi said.

“We have seen this cycle and have grown accustomed to EchoStar’s eye-popping consumer offers, which leave investors scratching their heads,” he explained.

Nabi expressed support for EchoStar’s new thrust to balance its previous discounted programming offers with equipment subsidies, such as the DVR deal aimed at boosting its monthly ARPU (average revenue per unit). EchoStar previously had been focused on attracting the most price-sensitive customers, while rival DirecTV offered NFL Sunday Ticket and other exclusive programming to lure upscale prospective subscribers who tend not to chase discounts.

EchoStar now is the industry’s low price leader when it comes to satellite set-top boxes and DVRs, said Sean Badding, a satellite broadcasting analyst with The Carmel Group.

“Don’t think for a second … that EchoStar has DVR dementia,” Badding said. “Its new DVR business model is a smart strategy, since it avoids a significant portion of the cost risk, while maximizing the new subscriber opportunity. EchoStar was the first multichannel service provider not to charge a monthly DVR service fee. It’s now also the first provider to give away a DVR box free to subscribers, with the exception of a few conditions. Don’t expect an immediate marketing reaction from cable or DirecTV, but do expect these companies to pay very close attention to the rollout.”

DirecTV’s Pitch

Robert Marsocci, senior director of corporate communications at DirecTV, said his company was planning “aggressive DVR promotions” of its own beginning this quarter and throughout the upcoming holiday shopping season. The specific offers should be finalized soon, he added.

“We believe that with TiVo, we have the best, most compelling DVR product on the market today, as well as the best brand names,” Marsocci said. “At retail, our DVR offer for new customers is $199 with installation.”

EchoStar’s new DVR 510 features a seven-day on-screen program guide, a 120-gigabyte hard drive capable of up to 100 hours of tapeless recording, and parental locks. EchoStar’s promotion will give each new customer a free DISH Player DVR 510, satellite dish, remote control, as well as free standard professional installation. The promotion, valued at $299 per subscriber, is offered to a new customer who agrees to pay a $49.99 activation fee that will be credited on the first bill and who commits to subscribe to one of the company’s programming packages for at least 12 months.

Customers who make a 24-month commitment will be eligible to receive a free Dish301 satellite television receiver for use in a second room, in addition to the DVR 510. The promotion is scheduled to end Jan. 31.

EchoStar’s new video on demand service will allow viewers to skip commercials and other pre-recorded programming without videotape, as well as pause live TV, perform slow- motion instant replays, fast forward and fast reverse, company officials said. The company will not charge new customers who sign up for its video on demand service, if they also subscribe to the company’s premium, “America’s Everything Pak” programming.

A monthly fee of $4.98 a month will apply to DVR customers who choose either the America’s Top 100 or America’s Top 150 programming packages. EchoStar’s subscribers who take the America’s Top 50 package would pay $9.99 a month.

Existing DISH Network subscribers who want the DISH Player 510 must pay $349, as well as the monthly service fee, Merrill Lynch’s Nabi explained.

–Paul Dykewicz

(Vijay Jayant, Lehman Brothers, 212/526-6019; Marc Nabi, Merrill Lynch, 212/449-2468; Sean Badding, The Carmel Group, 310/643-2222;Robert Marsocci, DirecTV, 310/726-4656)