Three Key DBS Events Define October

By Jimmy Schaeffler

Three developments in the U.S. satellite TV arena are especially worth highlighting this month.

First, there was an impressive rollout by Cablevision Systems [NYSE: CVC] of its new Ku-band, high-powered satellite service. Second, Hughes Electronics [NYSE: GMH] made progress in shoring up DirecTV as a competitor to rival EchoStar Communications [Nasdaq: DISH]. Third, DirecTV and EchoStar intensified their battle for spectrum and satellites.

VOOM’s Vision

The most striking announcement was the Oct. 15 unveiling of the 21 high-definition TV (HDTV) channels that will comprise the core of the new VOOM service led by Cablevision Chairman Chuck Dolan and Rainbow DBS COO Mickey Alpert. VOOM is the type of service the industry has been begging for since 1999 when satellite TV market-share leader DirecTV bought U.S. Satellite Broadcasting and PrimeStar. With the successful July 17 launch of its first satellite, Rainbow-1, Cablevision now is poised to break up the U.S. satellite TV duopoly. The new VOOM service launch gives consumers another choice and should be viewed as additional multichannel video competition by the Federal Communications Commission (FCC).

VOOM’s big time New York City unveiling and advertisement in The Wall Street Journal, following months of relative silence, shows Cablevision’s new venture is ready for business. Cablevision previously has carved out a niche by creating cable TV content through its Rainbow Media subsidiary. That same content unit will be providing unique HDTV programming to VOOM. Cablevision also is a sports franchise owner, as well as a multichannel cable operator to millions of subscribers in the New York City area.

With an up-front hardware package of $749 — roughly what DirecTV charged when it launched service in 1994 – and monthly fees that are slightly higher than those of its rivals, VOOM is aiming at the high-end consumer market, as well as early adopters who like the latest and best technology. A second VOOM set-top box for a household is expected to cost $500.

VOOM is based on a business model that recognizes the scarcity of HDTV programming and aims to fill the void. All of VOOM’s rivals offer single-digit numbers of HDTV channels, compared to 21 exclusive, commercial-free channels created by Rainbow Media just for VOOM subscribers. By February 2004, VOOM plans to expand its offering to 39 HDTV channels and 88 standard-definition channels, including more than 40 cable channel favorites. As a result, people who are willing to pay a bit more money will be able to receive a great deal of proprietary HDTV programming compared to what they could obtain elsewhere. The Carmel Group predicts that high-end customers will prefer VOOM because they are most likely to want HDTV content of any kind. In fact, they may prefer HDTV content of any kind to their traditional programming choices in standard-definition or analog cable. Nonetheless, VOOM is fighting an entrenched DBS and cable marketplace of approximately 85 million-plus installed customers. In addition, VOOM may need too much time to grow its subscriber base to satisfy investors.

DirecTV’s Call

DirecTV’s Oct. 14 analysts’ call included a refreshingly large number of new data points. The data featured numbers showing the good health of DirecTV’s digital video recorder (DVR) business. Along with HDTV, both DirecTV and EchoStar have staked their future growth on consumers’ interest in hard drives that pause, record, and rewind TV programs, allowing them to watch their favorite programs anytime they want.

The 326,000 net new DirecTV subscribers posted for the third quarter was quite a surprise, not only for Wall Street but also for DirecTV’s management. Yet, another pleasant surprise for DirecTV and the industry was the increase in the key benchmark of average revenue per unit (ARPU). For the third quarter, DirecTV’s ARPU rose to a record high of $63.70 a month, while churn dropped to 1.6 percent.

Loral Derby

EchoStar tried to turn the bankruptcy proceedings of Loral Space and Communications [OTC: LRLSQ] into something akin to a poker game. EchoStar bid aggressively to buy the DirecTV 7S satellite off the factory floor of Loral’s satellite manufacturing arm Space Systems/Loral (SS/L). DirecTV parent Hughes countered each EchoStar move by raising its offer and committing to buy additional satellites from Loral for DirecTV and its PanAmSat [Nasdaq: SPOT] subsidiary.

EchoStar also attempted to obtain additional capacity by competing with Intelsat to buy Loral’s North American satellite assets. Loral originally agreed to pay roughly $1 billion to buy those assets but EchoStar stepped forward and offered $1.029 billion for the same assets. EchoStar also proposed buying all of Loral, including its satellite manufacturing capabilities, for $1.85 billion. EchoStar failed to convince the bankruptcy court about the merits of its offers, but it did succeed in boosting the value of Loral’s assets and driving up the price needed by its rivals to complete their business deals (See story, p. 1).

And the Numbers, Please…

The Carmel Group estimates that the U.S. direct broadcast satellite (DBS) business totaled 20.95 million subscribers at the end of September. Accordingly, DirecTV is projected to have reached 11.85 million subscribers by that date, while EchoStar is estimated to have attained 9.095 million subscribers. All of EchoStar’s numbers below are estimates – unless otherwise noted. EchoStar is not expected to announce its third quarter results until mid-November.

At this stage, DirecTV retains roughly a 56.5 percent market share, compared to 43.4 percent for EchoStar. However, EchoStar has made steady quarter-over-quarter gains in market share at the expense of DirecTV.

Net new subscribers added during September amounted to an estimated 122,000 for DirecTV and 95,000 for EchoStar. Net new industry subscribers for September totaled 217,000. This growth was a slight improvement compared to the estimated net new subscriber gain for the prior month. In addition, the rise reflected an annual trend of growth during the months of September to December.

Year-to-date, DirecTV has added 782,000 net new subscribers, whereas EchoStar has added 915,000. DirecTV has averaged 87,000 net new subscribers per month since January, while EchoStar has averaged 102,000 net new subscribers per month.

Between July and September, DirecTV added 326,000 net new subscribers, compared to an estimated 295,000 for EchoStar. For the third quarter, the two DBS providers added an estimated 621,000 net new subscribers. If those numbers hold up, the companies will have added 18 percent more subscribers in the third quarter of 2003 than in the same quarter last year.

In fact, the subscriber gains during the third quarter this year appear to match the performance of the two companies in the robust fourth quarter last year. The fourth quarter this year could bring in promising growth in market share for the U.S. DBS industry compared to its cable rivals.

Jimmy Schaeffler is a subscription TV analyst at The Carmel Group, a publisher of industry databooks and monthly newsletters and a consultancy based in Carmel-by-the-Sea, Calif. ( http://www.carmelgroup.com ). The company specializes in telecommunications, computers and the media. He can be reached by e-mail at [email protected] or by phone at 831/643-2222.