Dollars And Sense: Direct-To-Home–A Driving Force
by Armand Musey
The growth of satellite industry is being increasingly driven by the proliferation of direct-to-home (DTH) satellite services. Currently millions of people watch some form of DTH service each day, and this figure is growing rapidly in both the developed and the less-developed world. This latter market is particularly important as the number of potential viewers is huge and current penetration rates diminutive. We estimate globally, DTH services will generate $42 billion in revenues in 2002, or roughly 60 percent of total industry revenues, and project that by 2006 this figure will grow to $77 billion.
In the developed world, we believe the competitive market offering is rapidly becoming 200+ channels of digital television, an interactive program guide with various information/interactive services, and bundled broadband access. In Europe and Japan, DTH services are being linked with DSL and/or broadband satellite services so that old and historical infrastructure does not need to be torn-up to lay digital cable. In North America, DTH growth is occurring because it is the only way to provide this sort of market offering to the large, less-densely-populated regions of the United States and Canada, where digital cable services are unavailable and economically unfeasible.
In the less-developed world, DTH provides international multichannel television to countries with limited indigenous services. In this context, the forces of globalization are driving DTH’s rapid growth: the rising income of a global middle-class, their rising expectations, a proliferation of media outlets and an increasing interconnection of cultures. And in many ways the rapid growth of DTH services is driving the forces of globalization. Nowhere is this more evident that in the rise of Al Jazeera, the news and talk network based in Dubai that in just two years has become the CNN of the Arabic-language world and an important window into that part of the world for the rest of us.
As DTH services proliferate, we believe there will be a trend toward vertical integration, as the large media conglomerates seek to expand and control their distribution on a global basis. The visionary at the forefront of this trend is clearly Rupert Murdoch, whose News Corp., through its control of BSkyB and the Star Asia platform, is the largest DTH services provider in Europe and Asia. In addition, the Franco-American media conglomerate Vivendi-Universal, which controls Canal Plus, the number two DTH service provider in Europe, has recently revealed its global ambitions by forming a strategic alliance and making a $1.5 billion investment in the number-two U.S. provider, Echostar.
If Echostar’s proposed merger with Hughes is successful, we believe Chairman and CEO Jean-Marie Messier’s alliance with Ergen would be a real coup for Vivendi. Namely, a combination of Echostar and Hughes would provide an effective North American bulkhead against News Corp. because of its control of all the full-CONUS U.S. orbital slots. However, we continue to maintain that a successful consummation of this merger is unlikely because of anti-trust regulations. If the merger is not successful, it has been widely speculated by both the press and investment community that Murdoch will renew his efforts to acquire Hughes in order to complete his global DTH platform.
In many ways, outside of the proliferation of DTH services, the past couple of years have been somewhat dismal for the global satellite business. First, we had the spectacular failures of Iridium and Globalstar. Then we watched the FSS industry slide down an increasingly slippery slope of increased competition, excess capacity, and falling transponder prices. And most recently, we have seen a significant pullback in the development of consumer broadband satellite services, which has had a significant, negative impact on some of the downstream satellite ground equipment suppliers, such as Gilat and Viasat, who had hoped to develop the user terminals for these services.
We believe it is only a matter of time before the satellite industry returns to more stable growth, and when it does it will be largely because of a pull-through from continued strong DTH growth. On a macro-economic level, the proliferation of DTH services is the largest driver of new satellite development. On a micro-economic level, it is causing many satellite companies to rethink their business strategies. For example, outside of the United States, where FSS companies typically provide the transponder capacity for DTH service, an increasing disparity between high transponder lease rates for DTH services and other more commodity-like backhaul services is causing many FSS companies to rethink their business development strategies to focus on DTH.
Nowhere is DTH’s importance to the overall health of the industry more apparent than in North America, where the entire industry is waiting to see if the proposed merger of Echostar and Hughes will be approved. This high-level expectation is because the outcome of this merger could change the competitive dynamics of the market significantly. Until this issue if resolved, we believe U.S. satellite industry capital expenditures will remain below normal levels. That means fewer new satellite orders, a postponement of broadband satellite service development, and a less positive outlook for many of the stocks that we cover.
Armand Musey is the satellite communications analyst at Salomon Smith Barney (SSB). The foregoing article should not be considered as a recommendation with respect to any security. SSB 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.