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DirecTV Sets Brisk Growth Pace

By | January 19, 2004

      Fresh off its best quarter in subscriber gains in its history, Segundo, Calif.-based DirecTV, a unit of Hughes Electronics [NYSE: HS], is ready to rumble under new owner News Corp [NYSE: NWS].

      DirecTV plans this year to introduce new high-definition programming channels, offer local channels in more than 90 percent of the country and debut new interactive services and advanced set-top receivers, said Mitchell Stern, the new president and CEO of the satellite TV provider. “We will give consumers the best television experience in the country and provide them with yet several more reasons to switch to DirecTV from cable television,” he added.

      And there is reason for Stern’s optimism. DirecTV connected 861,000 total new customers during the fourth quarter and netted 405,000 to its subscriber base after factoring in a monthly churn rate of 1.45 percent. The robust growth helped DirecTV boost its new customer total by 39 percent, compared to the fourth quarter of 2002.

      The company also set a growth record for full-year 2003 by adding slightly more than 3 million total customers and almost 1.19 million net new subscribers. The gains left DirecTV with more than 12.2 million year-end subscribers, including customers signed up by the National Rural Telecommunications Cooperative (NRTC).

      DirecTV’s strong showing was the result of “pretty solid” management decisions over a number of consecutive quarters, said Jimmy Schaeffler, a satellite broadcasting analyst who heads The Carmel Group, a consulting firm in Carmel-by-the-Sea. It will be interesting to see what subscriber numbers rival EchoStar Communications [Nasdaq: DISH] posts when it releases results later this month or in early February, he said. That additional information is needed to determine if DirecTV’s subscriber growth is “company-centric” or reflective of the entire satellite TV industry, he added.

      Bruce Leichtman, president and principal analyst at Durham, N.H.-based Leichtman Research Group, said he wants to see DirecTV’s subscriber acquisition costs (SAC) when it releases its financial results early next month. One unanswered question is how aggressively the company promoted its service and whether that pace can and should be kept up, he explained.

      Canadian Connection

      DirecTV’s ability to provide local TV channels in additional markets will be expanded significantly with the launch of the DIRECTV 7S spot-beam satellite scheduled for sometime in the first quarter. DirecTV currently offers local channels in 64 TV markets and expects to add 18 markets by early April.

      To provide additional capacity more quickly, DirecTV is seeking authority from the Federal Communications Commission (FCC) to move its DIRECTV 5 satellite into the Telesat Canada-controlled orbital location of 72.5 degrees West Longitude. Should that move be approved, it would create an unusual situation of having an orbital slot assigned to Canada used to provide U.S. satellite TV services.

      DIRECTV 5 would remain at the 72.5-degree orbital position until the launch of Telesat’s new direct broadcast satellite (DBS). That new Telesat satellite would provide continuity of service at the 72.5-degree location, DirecTV officials said.

      With the moving of DIRECTV 5 and the deployment of DIRECTV 7S, DirecTV expects to have sufficient capacity to offer local broadcast channels in a minimum of 130 markets by year-end, accounting for 92 percent of U.S. television households. Hughes committed to provide local channels to 130 markets as part of the concession package to gain FCC approval of the company’s acquisition by News Corp.

      The sharing of the orbital slot is a “mutually beneficial arrangement for DirecTV and Telesat Canada, offering unique public interest benefits for consumers in our respective countries,” Stern said. The plans for using DIRECTV 5 are contingent on the successful launch of the DIRECTV 7S satellite later this quarter, as well as FCC approval for the relocation, he noted.

      Regulatory Roadblocks?

      Tim Logue, a satellite consultant in the Washington office of the Coudert Brothers law firm, observed that there is a “long history” of U.S.-Canada cooperation in using the North American satellite arc. At the same time, the Canadian government limits the amount of U.S. programming that can be aired in Canada as part of an effort to protect the country’s culture.

      “These issues are matters of high politics on both sides of the longest undefended border in the world,” Logue said. “It will be interesting to see how far things have moved since 1996, when the FCC rejected two proposals to use Canadian DBS satellites to serve the U.S. market.”

      Paul Bush, Telesat’s vice president of broadcast and corporate development, said, “We typically have an extremely good relationship between the Canadian and American satellite operators. In the past, when American satellite operators have had failures or shortages of capacity, Telesat has provided capacity to our counterparts in the United States. In this particular case with DirecTV, there is a shortage of U.S. DBS capacity and DirecTV has obligations to provide high-definition television, interactive television, local-into- local services. This agreement is an innovative way of doing it.”

      If satellite TV service providers are going to be on a fair footing with cable operators, they will need to find ways of expanding their capacity, Bush explained.

      HD Inroads

      In addition to local services, DirecTV is expanding its high-definition and enhanced digital television programming with plans to offer CBS HD programming, including an agreement to provide the upcoming Super Bowl in HD format. A similar agreement is expected in the coming weeks with Fox Television Stations Group, a unit News Corp’s Fox Entertainment Group [NYSE: FOX], which has a 34 percent stake in Hughes.

      DirecTV also made progress on the legal front this month when the U.S. District Court for the Central District of California approved an agreement to settle a distribution rights dispute with the National Rural Telecommunications Cooperative (NRTC). NRTC, an early financial backer of DirecTV, had an agreement along with its affiliates to distribute DirecTV programming in rural markets. Among other things, the settlement agreement calls for the two sides to extend their current relationship until June 30, 2011, after which time DirecTV would have no further obligation to provide services to the NRTC.

      The court ruled that the settlement is “fair, just, reasonable and adequate.” The settlement provides the NRTC and certain of its affiliates with the opportunity to profit from DirecTV sales for “an extended period on reasonable economic terms,” the court concluded. The compromise resolves a four-year dispute between the NRTC and DirecTV.

      However, the settlement does not cover a dispute DirecTV has with Pegasus Communications [Nasdaq: PGTV], which distributes DirecTV programming through the NRTC. The court has set a March 23 trial date to review DirecTV’s lawsuit seeking approximately $60 million that it alleges is owed to it by Pegasus under their existing marketing agreement.

      Latin Recovery

      DirecTV Latin America took a step toward exiting Chapter 11 bankruptcy protection earlier this month when U.S. Bankruptcy Court Judge Peter J. Walsh in Wilmington, Del., approved a disclosure statement filed as part of its plan of reorganization. That approval puts DirecTV Latin America on track to emerge from Chapter 11 early this year.

      Wall Street analysts have speculated that News Corp may seek to combine the Hughes subsidiary with its Sky Latin America operation to save administrative costs and create a profitable satellite TV service to compete with the cable operators in Latin America. “As of right now, the two Latin American satellite TV operators have no intention of merging,” said Carmen Hiers, a spokeswoman for DirecTV Latin America.

      DirecTV Latin America filed for Chapter 11 in March to address its mounting financial and operational challenges. The bankruptcy court filing did not include DirecTV Latin America’s affiliated operating companies in Latin America and the Caribbean.

      Bankruptcy Judge Walsh ruled that the disclosure statement offered adequate information for DirecTV Latin America to begin soliciting creditor approval for the reorganization plan. He has scheduled a Feb. 13 confirmation hearing. DirecTV Latin America has mailed to creditors and other qualified claimants the notice of the proposed confirmation hearing, along with the plan, the disclosure statement and ballots. Upon receipt of the plan’s approval by the creditors and the court, DirecTV Latin America would emerge from Chapter 11 by the end of February, company officials said. –Paul Dykewicz

      (Robert Mercer, DirecTV, 310/726-4683; Jimmy Schaeffler, The Carmel Group, 831/643-2222; Bruce Leichtman, Leichtman Research Group, 603/397-5400; Tim Logue, Coudert Brothers, 202/736-1816; Paul Bush, Telesat Canada, 613/748-0123; Carmen Hiers, DirecTV Latin America, 954/958-3212)

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