DirecTV Surges, EchoStar Slows In Quarter
Englewood, Colo.-based EchoStar Communications [Nasdaq: DISH] surprised the multichannel world last week by breaking a pattern of growth leadership and reporting several financial and subscriber metrics that uncharacteristically fell below the results of its main rival, El Segundo, Calif.-based DirecTV. For the first time in five straight quarters, EchoStar did not exceed DirecTV’s subscriber count and did not increase its overall percentage share of the U.S. direct broadcast satellite (DBS) market. In response, EchoStar’s stock closed down on the day 4.75 points, or nearly 13 percent, based largely on trading during the three or so hours following the company’s conference call with analysts and prior to the market’s close.
On the same day, the stock of DirecTV’s parent company, Hughes Electronics [NYSE: GMH], lost only one fourth as much value as EchoStar. The Hughes stock only dropped 3.5 percent on a day when the overall market also drifted down slightly. In comparison, the Nasdaq and Dow Jones markets each lost less than 1 percent of their values that day. Nasdaq lost 11 points, dropping from 1,942 to 1,931; and the Dow lost 19, going from 9,357 to 9,338. The trend for Hughes generally has been up since late October, buoyed by Wall Street’s positive view of what the management under Chairman Eddy Hartenstein and President Roxanne Austin has been able to accomplish. Wall Street also may like where DirecTV could be heading under the guidance of Rupert Murdoch and his management team, assuming U.S. regulators approve the sale of Hughes to News Corp [NYSE: NWS] and its Fox TV unit in early 2004.
DirecTV reported good financial and subscriber metrics on Oct. 14. The third quarter numbers showed: average revenue per unit (ARPU) of $63.70; subscriber acquisition cost (SAC) of $590; churn of 1.6 percent; and 326,000 total net new subscribers.
In contrast, EchoStar executives held a somewhat downcast conference call on Nov. 11. Also on that day, DirecTV went out of its way to announce the addition of its 12-millionth customer. The DirecTV subscriber number includes 1.57 million customers who are affiliated with the National Rural Telecommunications Cooperative (NRTC) and its rural franchise partner Pegasus [Nasdaq: PGTV]. For the DirecTV platform, some 113 months after its national launch on June 17, 1994, the benchmark equals an average of 106,195 net new subscribers added per month, or about 1.29 million net new subscribers per year. For full-year 2003, The Carmel Group estimates total subscriber income for DirecTV alone will equal more than $7.5 billion. This figure consists of basic package, pay-per-view (PPV), digital video recorder (DVR), local-into-local (LIL), and high definition TV (HDTV) revenues. Of course, it is important to note that the early years for DirecTV did not create anywhere near that kind of subscriber revenue, nor annual ARPU. Since then, a host of premium channel packages and other advanced features have been rolled out to boost that ARPU figure.
DirecTV management last month attributed its success in the third quarter to four key factors. One, promotions included the exclusive NFL Sunday Ticket package. Two, consumer recognition of the DirecTV “value proposition” is growing, especially since 45 percent of new DirecTV subscribers for the quarter came from digital cable. Three, good response flowed from a program to allow consumers to acquire and to install three receivers for no up-front payment. Four, a lift came from a strong media presence, including national TV, and local newspaper and radio ads.
In what remains a rare, yet characteristic, explanation EchoStar CEO, Chairman and Founder Charlie Ergen accepted the blame for the company’s less-than-stellar results. Key metrics that apparently forced the stock down were weakened subscriber growth, first and foremost, followed by a drop in the EchoStar measure of ARPU and higher than expected monthly churn. EchoStar’s net new subscriber adds for the third quarter were 285,000, which was 41,000 fewer than DirecTV’s numbers. The lower than expected EchoStar ARPU was stated at $50.79 for the third quarter.
Ergen also attributed the slower subscriber pick-up to competition from DirecTV – especially the multi-year renewal of its NFL Sunday Ticket package. In addition, Ergen noted, revenues were affected by free subscription promotional packages. He cited self-inflicted supply problems with new products such as EchoStar’s Super Dish, its HDTV DVR product, and its receiver with two tuners. He also lamented the slow EchoStar rollout in new local markets. In the end, Ergen tasked himself and his management team with doing a better job to bring in subscribers because “the core business is good.”
Other topics Ergen addressed included litigation involving distant network signals, a bundling agreement with telephone company SBC Communications [NYSE: SBC], the effects of free programming on quarterly metrics, and EchoStar’s plans for its future products and future competition. On the horizon are expanded HDTV offerings and stepped up competition once U.S. regulators approve News Corp.’s purchase of Hughes and its DirecTV unit. Another factor is the impact of Cablevision’s [NYSE: CVC] new HDTV-centric VOOM service.
For the industry as a whole, a total of 20.935 million subscribers received some or all of their TV services from DirecTV or EchoStar by the end of the third quarter. As of late October, the industry reported it had passed 21 million subscribers. This means that from a universe of 107 million U.S. TV households (TVHHs), U.S. DBS owns one in every 5.1 subscribers. From a U.S. subscription TV universe of 88 million, DBS owns one in every 4.2 households. For DirecTV, 12 million subscribers mean it is the TV entertainment service of choice in approximately one of every nine U.S. TVHHs. For EchoStar, its 9.1 million subscribers make it the choice of one of every 11.7 U.S. TVHHs.
At the end of the third quarter, DirecTV held 56.6 percent of the total U.S. DBS market share. EchoStar held the remaining 43.4 percent. As the pivotal last 45 days of the fourth quarter begin, expect DirecTV and EchoStar to do their best business of the year. The fourth quarter is the time during which those in the consumer electronics business typically acquire as much as 40 percent of their total sales for the entire calendar year. Our estimates for the months of August and September show DirecTV adding 112,000 and 122,000 net new subscribers, respectively. We estimated EchoStar added 95,000 and 97,000 net new subscribers in each of those months, respectively. Together, The Carmel Group estimates DirecTV and EchoStar added slightly over 200,000 net new subscribers in August and just shy of 220,000 in September. Net new subscribers added during the third quarter for both EchoStar and DirecTV came to 611,000, a 16 percent increase over net new subscriber gains during the third quarter of 2002.
Jimmy Schaeffler is a subscription TV analyst at The Carmel Group, a publisher of industry databooks and 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, firstname.lastname@example.org, or by telephone, 831/643 2222.