Dollars And Sense: Video Is Not The End Game For DBS
by Armand Musey
Television is about to get more interesting. New technologies are being deployed to DBS set-top boxes everywhere that could change the average couch potato into a member of the global online community, and consumers are not the only ones set to benefit from these offerings. Over the next couple of years, incremental services will positively impact DBS companies’ average revenues per user (ARPU), while bundling services will have a positive effect on customer churn rates by increasing the value proposition to subscribers. This will shorten subscriber payback periods and increase returns for the industry as a whole. Look for four broad categories of new services to roll out in the first half of 2001:
- Personal TV Services (TiVo, ReplayTV, etc.) are based on digital flash memory technology that can be used to store and manipulate video content. These services permit viewers to record, pause, fast-forward and edit broadcast television content, creating virtual video-on-demand and the personalization of content. Not only will these services replace your VCR, but because they include a “smart-chip” which has the ability to learn the type of programming you watch and search out and record similar programming, you will never again have to miss an episode of America’s Most Wanted.
- Enhanced TV Services (Wink, Liberate, etc.) are based on end-to-end middleware solutions that allow broadband and broadcast network operators to offer interactive programming and Internet-enabled services. With enhanced TV services, viewers are prompted (usually via a small on-screen icon) to request additional information, respond to advertisements, or make purchases. These services will let viewers access statistics on a favorite athlete, inquire as to the availability of a certain item at a local store, or order another pizza before Regis can ask if that is your final answer.
- On-Line TV Services (AOLTV, UltimateTV, etc.) offer television viewers full Internet connectivity. These are the most active forms of interactivity available on television. Using a keyboard and “smart” set-top box, viewers with on-line TV services can access most Internet content via their TV just as they would from their PC. With these offerings, users can expect to surf the Web, participate in chat rooms, comparison shop, or even research and book their next trip to Cancun, all without getting up out of the Lazy-Boy.
- Broadband Internet Access Services (DirecPC, etc.) will give DBS customers access to rich Internet content with the same access speeds as DSL and cable modem users by permitting them to connect their PC to the same satellite dish as their television. We believe two-way satellite broadband Internet access is a viable alternative in rural America, with 20 to 30 million potential customers who will likely never have access to a competing terrestrial broadband provider. However, we believe satellite broadband will have an uphill battle in markets with DSL and cable modem competition.
Some of these enhanced DBS services generate separate subscription fees, while others will offer DBS providers only ancillary revenue streams. Regardless of the economic model, enhanced DBS services offer a good value proposition to DBS providers as they all tend to make viewers more loyal and therefore more attractive to advertisers. Moreover, in the competitive multi-channel market, it is imperative that DBS companies provide all services for which a consumer may have a defined preference, even if these services are offered free to PC Internet users and must therefore be offered free to DBS consumers.
DBS investors will see improved results in the latter half of 2002 as incremental revenue from these services begins to fall to the bottom-line. Over the long-term, these enhanced DBS offerings, along with broadband Internet access solutions, could have a positive impact on DBS providers’ average monthly revenues per user and decrease churn rates, resulting in shorter subscriber payback periods and increasing returns. While it is difficult at this point to quantify the total economic benefit for DBS providers, DirecTV has publicly indicated it expects to generate between $7-$12 in incremental monthly APRU from these services, not including two-way broadband Internet access.
It is becoming increasingly apparent that video is not the end-game for multi-channel providers. DBS providers are well positioned to make the most of this race to change TV. The DBS subscriber base is already digital and many DBS consumers already have the set-top boxes that will accept these offerings, or set-top boxes that can be enabled via remote software download. For DBS providers, this opportunity is coming not a moment too soon. Competition in the multichannel world appears to be increasing and industry economics seem to be tightening – average subscriber life is shortening and the average cost of acquiring these subscribers is increasing. The rollout of enhanced DBS services could be the antidote to softening industry economics.
Armand Musey, CFA is a satellite communications analyst at Banc of America Securities LLC (BAS) . The foregoing article does not necessarily reflect the views of the Via Satellite editors and should not be considered as a recommendation with respect to any security. BAS and its affiliates may maintain a long or short position in, act as a market maker for, or purchase or sell a position in, securities of referenced entities and may also perform investment banking, advisory, or other services for any such entity.