EchoStar Grows At Rival Cable’s Expense

Englewood, Colo.-based EchoStar Communications [DISH] briskly grew its subscribers and revenues during second-quarter 2004, compared to the same quarter last year. According to CEO Charlie Ergen, his performance left it short of rival DirecTV’s growth during the same period but the Dish Network now is positioned well when compared to its cable TV adversaries that suffered a net overall subscriber loss during the second quarter.

EchoStar’s Dish Network satellite television service provider added 340,000 net new subscribers during the second quarter to total a touch more than 10 million customers.

Ergen was not shy about pointing out that both DirecTV and EchoStar appeared to be growing at the expense of their cable TV competitors.

“DirecTV’s subscriber growth is really impressive,” Ergen said. “The satellite industry has good momentum in the marketplace. Cable almost across the board is seeing negative numbers. We are relatively surprised with the [satellite TV] growth.”

During a conference call last week with Wall Street analysts, Ergen said his company’s second-quarter 2004 performance was “pretty solid” overall. The new installations are positive but they do require carrying more inventory and hiring more people. “That puts a lot of pressure on margins until you become efficient with the new hires,” he explained.

Investors apparently liked what Ergen was telling them last week. EchoStar’s share price between Aug. 6 and Aug. 12 rose 8.8 percent, compared to dips of 5.5 percent last week for Nasdaq, 3.2 percent for the Standard and Poor’s 500 index and 3.8 percent for the SN Stock Price Average (see stock chart on p. 10). On the revenue side, EchoStar reached $1.78 billion during the second quarter, topping the $1.41 billion it amassed during the same time last year. However, increased expenses from the quickened growth, including the cost of new customer installations, caused the company’s net income to dip to $85 million, down from $129 million during the same period a year ago.

Inefficiencies Acknowledged

Ergen, as usual, was not reluctant to talk about EchoStar’s shortcomings. Because he holds controlling interest in the company, Ergen has been unusually frank in assessing EchoStar’s management performance, compared with other CEOs.

“We blew $30 million on inefficiencies during the last quarter, and I hate that,” Ergen said. “You’re never going to get that money back. However, we have greater opportunity to improve our margins going forward.”

One positive sign is EchoStar’s partnership with SBC Communications, a regional telephone company headquartered in San Antonio, Texas. SBC has been selling EchoStar satellite TV service in a bundled package to subscribers. Under that alliance, SBC co-brands the service, called SBC Dish Network, and offers a discount to its subscribers who want to add the video capability.

“The SBC relationship is continuing to move along and showing solid progress,” Ergen said. He added that his company doesn’t have many partnerships with telcos but it does well with those it pursues.

From a financial standpoint, EchoStar benefits about as much from SBC signing up a new subscriber for the Dish Network than if the satellite TV operator does so directly, Ergen said. The average revenue per user (ARPU) is similar as well.

The SBC relationship is one additional marketing channel, Ergen explained. “We don’t break out direct sales versus other kinds of sales. The SBC deal has a slight positive effect on ARPU,” he said. “The main drivers of ARPU growth are reduced subsidies. SBC hurts us on our margins because we incur expenses for installation.”

While the subscriber gains from the SBC alliance are lumped in with the customers added directly by EchoStar, a break out of each contribution could occur in the future if the numbers become large enough to warrant doing so, Ergen said.

“Ultimately, you need to view our company by free cash flow, after interest and capital expenditures,” Ergen told the analysts, adding, on that basis, EchoStar “looks very good.”

Despite falling short of matching DirecTV’s growth numbers for the second quarter, Ergen said his company spends less money on retaining customers than its rival.

“DirecTV spent more then $200 million in retention marketing,” Ergen said. “We were a fraction of that amount. We have to balance the money for retention marketing with the opportunities for gaining new customers. We run the math. We would look at retention marketing as a balance between saving the customer and using the money at getting a new customer.” Ergen said it is better to let certain low-end customers go elsewhere for service.

Ergen also talked about not giving away as much free programming this year as another form of progress for his company. “Those giveaways are an indirect cost of subscriber acquisition costs (SACs),” Ergen said. “Because we are leasing some equipment, we have a mechanism that can lower our SAC.”

Though others may disagree, Ergen thinks his company’s “more disciplined” approach to spending money is a better course than the one taken by many others in the marketplace today.

Installation Investment

EchoStar also seems to have resolved problems in the past year stemming from inadequate amounts of product and numbers of installers.

“For the most part, we have our installation capacity where it needs to be,” Ergen said. “If you look at margin erosion on customer care and subscriber-related expenses, half of that margin erosion involves inefficiencies in our businesses. Half of our inefficiency involves ways that we in management have done a poor job, and we need to do better.”

Cable operators are facing formidable competition, Ergen emphasized, especially if they don’t have any advantage with HDTV or other new technology on the horizon.

The real focus for both DirecTV and EchoStar is not battling each other for customers but taking them from cable, Ergen said. Cable’s 67 million subscribers are an inviting target.

“We need to go out and get customers from those [cable] guys,” Ergen said. “Cable bounty programs are $500 or $600, and they are still losing subscribers. Maybe they should start paying $1,000.”