Satellite and Wireless Services Gain Traction

By Jimmy Schaeffler

LAS VEGAS–In the competitive ebb and flow of the U.S. multichannel video market, satellite and wireless technologies have gained significant advantages, based on what was shown to 110,000 participants at the Consumer Electronics Show (CES) held here this month. One of the few real highlights of the show was the emergence of Wi-Fi as a new delivery system within the home. The good news for the satellite industry is that the technologies are complementary, since both use spectrum and neither requires wires.

Powell’s Pointers

At the show, Federal Communications Commission Chairman Michael Powell discussed his accomplishments and hopes for the future of telecommunications. Powell was especially sanguine about the possibility of Wi-Fi serving a larger number of consumers. Digital video recorders (DVRs) and satellite radio drew special note from the chairman. He said radio services via satellite are here to stay, along with digital service originating from terrestrial AM/FM stations. Broadband services, especially those that can deliver telemedicine service and educational tools, are big on Powell’s agenda. The expansion of broadband services presents opportunities for satellite and wireless companies. Powell opined, “With broadband, you keep jobs in the United States and you can do most things anywhere.”

Powell drew modest applause when he said government should demonstrate to business why regulation is needed, rather than business arguing with government about why regulation is not needed. Further, the FCC chairman expressed his latest mantra that “nothing is immune from migration to digital.” Powell identified three key driving forces in tomorrow’s digital telecom business climate – “silicon, speed and storage.”

Satellite Radio Rising

Both XM Satellite Radio [Nasdaq: XMSR] and Sirius Satellite Radio [Nasdaq: SIRI] used the CES Show to unveil their latest products at booths filled with cars, stars and music. Industry-leader XM announced that its year-end 2003 subscriber total reached 1.36 million, compared to approximately 350,000 customers amassed by the end of 2002. For rival Sirius, the year-end 2003 count measured 261,000, up from 30,000 at the end of 2002.

XM’s growth is more impressive, since it involved greater subscriber gains in the fourth quarter than achieved by satellite TV service leader DirecTV. XM’s fourth quarter additions measured 430,000, versus 405,000 net new subscribers for DirecTV (see chart). XM’s announcement of deals to showcase its radio service on flights of JetBlue Airways [Nasdaq: JBLU] and AirTran Airways [NYSE: AAI] also was a satellite radio industry first.

Future subscriber growth projections call for Sirius to reach 1 million customers by year-end 2004, while XM is expected to amass 3 million by the close of this year. Sirius also gained a bit of additional luster by touting its new hardware alliances with Alpine and Delphi [NYSE: DPH], as well as discussing plans to initiate factory-installation programs with Ford [NYSE: F] and DaimlerChrysler [NYSE: DCX] for the 2005 and 2006 model years.

DBS Developments

Two of the three existing U.S. direct broadcast satellite (DBS) players — Cablevision [NYSE: CVC] subsidiary Rainbow DBS and EchoStar Communications [Nasdaq: DISH] — offered attendees new hardware and software at their respective CES booths. For the first time, DirecTV was absent from the CES exhibit floor. DirecTV officials explained that a lack of certainty about the timing of the company’s sale by General Motors [NYSE: GM] to News Corp [NYSE: NWS] led it to rein in spending and use conference rooms, rather than a booth, to communicate with CES attendees. DirecTV’s key announcement was a deal to use the 72.5- degree West orbital slot of Telesat Canada to deliver DBS channels to U.S. consumers. DirecTV also added 3 million new subscribers in 2003, which translated into 1.2 million net new subscribers after churn is considered. This gave DirecTV 12.2 million customers at year-end.

A panel discussion moderated by Sean Badding, president of The Carmel Group, highlighted EchoStar’s development of a new mobile, take-it-with-you-anywhere DVR. EchoStar now provides local broadcast channels in 100 metropolitan areas. Rainbow DBS’ Voom service unveiled a new, in-home coaxial cable solution tied in with software from Massachusetts- based Ucentric. Voom also brought its high definition (HD) line-up with 30 total channels, including recent additions the NFL Network, PlayboyTV, and Starz HD East and West.

Tantalizing Talk

Insights into industry developments and strategies were offered during two key CES panel sessions. Hosted by the satellite industry trade group, the Satellite Broadcasting and Communications Association (SBCA), one session dealt with mobile satellite services, while the other addressed set-top box (STB) technologies.

At the first session, participants included moderator Bill Gerski, principal at Atlas Business Development; along with panelists Stan Kozlowski, senior vice president of Sirius; Chuck Uhl, vice president at MotoSat; Dan Murphy, senior vice president of XM; and Sean Schwinn, vice president at Boeing [NYSE: BA]. Motosat’s Uhl unveiled his company’s plans for antenna products focused on RVs, trucks, SUVs and minivans for the U.S. satellite TV services. He also disclosed plans to offer two-way Internet services to the mobile market. Boeing’s Schwinn outlined recent tests delivering Internet service to airline passengers. The service tested two price points for the service: $25 per flight and $35 per flight. A hefty chunk of that revenue would go to the airline partners of Boeing’s Connexion by Boeing unit. Sirius’ Kozlowski presented market research information that showed his company had achieved an enviable customer rating in which 94 percent of its users are “very satisfied.” In addition, 89 percent of its current subscribers would recommend satellite radio to a friend. XM’s Murphy zeroed in on the ultimate determinant of success in the multichannel marketplace: content. He noted XM’s recently announced plans to introduce several new entertainment channels to replace existing channels. In 2004, XM expects automobile factory installations to reach 40 percent to 50 percent of its total growth objective, with retail sales providing the remaining share, he added.

The STB panel moderated by SBCA’s David Pedigo featured panelists Mark Jackson, senior vice president of EchoStar; Laura O’Donnell, vice president at DirecTV; Doug Lankford, general manager at Thomson; Dick Armstrong, vice president of Hughes Network Systems; and Frank Romeo, a director at Samsung. Most of the talk during the session was forward- looking and devoted to the advanced services new STBs will enable, such as HDTV, DVRs and interactive TV (iTV).

Satellite and cable companies are looking to DVRs to bring in more loyal subscribers who are less likely to drop service. Compared to most cable operators, which are focusing on video-on-demand (VOD), DirecTV’s O’Donnell said that DVRs are superior because “VOD goes away, while DVRs capture content for as long as the consumer wants.” EchoStar’s Jackson expressed the concerns of many when he criticized the government for approving a new plug and play STB standard that includes cable technology, but not DBS technology. Armstrong, Lankford and Romeo all stressed the importance of creating a new uniform standard for STB connectors, even though such a move may mean increased STB costs. When asked by an audience member to outline EchoStar’s plans to implement a new wireless device to deliver DISH Network signals in the TV household, Jackson confirmed his company’s significant interest. However, he added that the service is “not yet ready for primetime because of video drop-outs and other quality issues.” Once a wireless technology is found that works effectively, EchoStar would be interested in implementing it, he added.

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. (www.carmelgroup.com). The company specializes in telecommunications, computers and the media. He can be reached by e-mail, [email protected], or by telephone, 831/643 2222.