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Bells Look To Satellite For Video Play

By | August 11, 2003

      The regional Bell operating companies’ latest strategy for providing video service appears to be teaming with direct broadcast satellite (DBS) service providers. Both SBC [NYSE: SBC] and Qwest [NYSE: Q] have recently signed deals with DBS providers aimed at bundled service.

      At first glance, the partnership seems natural. Telcos and DBS providers each have part of the voice, video, broadband “triple play.” And they’re both rivals of the cable providers who are closing in on the triple play themselves. But there are questions as to whether putting the two together really accomplishes anything. And there are even reasons to doubt whether the whole triple play concept is as important as everyone seems to think.

      It’s become a matter of faith in the telecom business that the future belongs to the provider who can deliver it all on one plate. Cable appears well on the way toward that goal. It’s already got the TV part nailed, of course. Cable modem service is obviously a success. There are even a few limited deployments of cable telephone service.

      But the video component of the triple play has bedeviled telcos for years now. At one point the future seemed to be in merging telcos and cable companies into vertically integrated giants. Then, once it became clear that the game was telcos vs. cable, the telcos looked into delivering video themselves by upgrading their networks with fiber or squeezing video onto copper via DSL.

      But both schemes have their disadvantages, and the growing partnership between telcos and satellite providers suggests an admission that telcos won’t be doing video themselves anytime soon.

      SBC has had a marketing agreement with satellite provider EchoStar Communications [Nasdaq: DISH] for a year, and has toyed with the idea of buying DirecTV from Hughes Electronics [NYSE: GMH]. Instead, SBC has strengthened the partnership with EchoStar to include a co-branded “SBC DISH” service to be offered to customers in areas where SBC offers residential phone service.

      Qwest signed strategic marketing agreements with both DirecTV and EchoStar covering different parts of its residential phone service territory. Colorado and Nebraska residents will have access to a Qwest bundle including EchoStar service. DirecTV will initially be offered in Phoenix, Tucson and Seattle.

      High Price To Pay

      The deals do indeed get TV service into a telco package. But cramming telephone and DSL service together with satellite TV is at best an awkward way to get there. Customers will still need a phone line and a satellite dish (compared to a simple set top box for cable bundles). There’s no leveraging of network resources, or synergies to exploit. In fact there’s nothing there that customers couldn’t have done themselves by just calling up the providers individually. The deals merely draw an arbitrary box around two pieces already on the board.

      The only way left to compete is on price. Indeed, SBC presently offers customers a $5 discount off the price of EchoStar service. But given that there are few, if any, real savings to be gained from bundling, that’s just more money out of carriers’ pockets. It’s a high price to pay to lock up that triple play deal.

      Indeed, there are reasons to suspect that DBS may not get the telcos where they want to go. According to industry analysts Horowitz Associates, digital cable has drastically changed the picture for satellite TV.

      “It used to be that satellite attracted customers most into a premium television product,” says President Howard Horowitz. “People wanted more sports, more premium channels, better picture, interactive program guide.” In the universe of cable-passed homes Horowitz pegs DBS penetration at around 17 percent, up from 1 percent in 1994, while analog cable penetration has remained more or less flat.

      Digital cable, however, has soared from 3 percent penetration in 1998 to 21 percent today, according to Horowitz, quickly outpacing DBS. In response, Horowitz says, “satellite has reversed itself.” As cable rates continue to increase, cable has gone after the high-end consumer, while satellite has become a lower-priced alternative.

      Lower-Priced Service

      There’s a market for lower-priced TV service and for lower priced phone service. But those are precisely the customers that aren’t buying broadband. Price-conscious users are making do with dial-up, and they have enough options for lower prices on TV and phone service that a bundle may have to be even more deeply discounted to get them aboard.

      Ultimately, Horowitz says, “they’re going to find that they’re not getting those low-priced customers. They don’t have a good enough platform, and that’s not who’s upgrading.”

      The Elusive Triple Play

      Other research actually calls the whole triple play concept into question. New Jersey-based Solomon-Wolff Associates has been asking consumers for the last five years if they’d be interested in a bundled offering of wireless, local and long-distance voice, TV and broadband service at about the price they’re paying now. From a high in 2000 of 64.9 percent saying they would be interested in such an offer, interest has fallen to 46.1 percent this year. Doug Solomon says the turning point was 2002, when interest plummeted from 2001’s 61 percent all the way down to 47.6 percent.

      Why would that happen? “It may just be that, over time, they find that they are not as stressed by this as they feared,” says Solomon. He notes that the telecom landscape was very confusing a few years ago, with whole new categories popping up, and everybody invading other sectors. But consumers have become a lot more sophisticated at, for example, managing minutes in a wireless plan.

      Weighed against mixing and matching the plans that best fit your needs, is it really that hard to write another check each month? Solomon notes that, today, “the ones that are most interested are the ones that are most dissatisfied with their current services.” In other words, one-stop shopping now seems to have more to do with better service than convenience.

      And that doesn’t bode well for the telco/satellite alliances. Maybe they can beat cable on service, but if they’re going to have to cut prices to the bone to do it, the payoff may not be as great as they had hoped.

      –John M. Sullivan

      (Howard Horowitz, Horowitz Associates, 914/834-5199; Doug Solomon, Solomon-Wolff, 973/763-7445)

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