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DirecTV Surges With Fourth Quarter Surprise

By | January 26, 2004

      By Jimmy Schaeffler

      DirecTV, the direct broadcast satellite (DBS) unit of News Corp [NYSE: NWS]-controlled Hughes Electronics [NYSE: HS], posted impressive subscriber year-end 2003 subscriber numbers. The results, released just before the all-important Consumer Electronics Show in Las Vegas, revealed that DirecTV netted 405,000 new subscribers to bring the company’s year-end customer base to 12.25 million. That subscriber total gives DirecTV a 56.5 share of the U.S. DBS market, or one out of every 7.3 U.S. multichannel pay TV subscribers. Rival EchoStar Communications [Nasdaq: DISH] has the remaining 43.4 percent of the U.S. DBS market share.

      Several elements led to DirecTV’s success. First, the company was aided by offering a new $99 set-top box, equipped with a digital video recorder (DVR). The deal included installation. Second, DirecTV offered to install and equip as many as three rooms in a home at no additional charge. Third, the DBS provider offered local-into-local (LIL) service and independent signals to 64 U.S. designated market areas (DMAs), covering 72 percent, or 76.5 million, of the 107 million U.S. TV households (TVHHs). In addition, good management execution and product availability boosted sales by both DirecTV and its independent retailers. Another factor of significantly less impact was the growing availability of high definition TV (HDTV). The U.S. households equipped to watch HDTV programming remains less than 10 million.

      For 2004, the new management team on the 11th floor of DirecTV’s El Segundo, Calif., headquarters is expected to focus on a handful of objectives. Those goals likely will include improving DirecTV’s service offering with interactive TV (iTV), sports programming, customer service, service-to-multiple dwelling units (MDUs), piracy management, and distribution of enhanced set-top boxes (STB). This year also could include resolution of an ongoing lawsuit involving Pegasus Communications [Nasdaq: PGTV]. News Corp also must develop Hughes Network Systems’ (HNS) fledgling SpaceWay program, while opening up substantial new Ka-band growth opportunities for DirecTV.

      EchoStar’s Renewal

      Long-time DirecTV rival EchoStar showed signs during the fourth quarter of recovering from a weak third quarter. EchoStar Chairman Charlie Ergen attributed the third-quarter slump to poor management execution and lack of adequate hardware inventory. EchoStar responded during the fourth quarter by redirecting its sights on marketing with a fresh new jab at the cable industry through a nationwide advertising campaign entitled “Don’t Feed The [Cable] Pig.” The all-important holiday selling season featured EchoStar rolling out several new hardware items that should boost EchoStar in 2004. First, the multichannel industry was aided by introducing operator-manufactured big screen HDTV monitors. The 811 model STB product offers a 34-inch direct view and a 40-inch rear projection monitor, along with a dish antenna package, priced for under $1,000. The 921 model STB, the multichannel industry’s first combined HDTV/DVR unit, initially was delivered in December 2003. That model offers up to 25 hours of HD recording space on a 250-gigabyte hard drive. Another first for EchoStar is its SuperDish, which delivers signals concurrently from satellites located at three Ku-band orbital slots.

      Another positive step EchoStar took during the fourth quarter was the launch in December of its 100th LIL DMA in Charleston, W.V. On the financial side, EchoStar showed renewed strength by completing a debt offering of $2.5 billion, as well as a $1-billion bond redemption. The latter deal saves EchoStar substantial interest in future quarters. Another positive for future quarters likely will involve RadioShack [NYSE: RSH] ending a retail agreement with DirecTV and making EchoStar the exclusive provider of DBS services for the chain’s 6,800 nationwide stores.

      Voom Vitality?

      Until the new Rainbow DBS satellite service named Voom achieves significant financial and subscriber growth, it will be next to impossible to evaluate it. Nonetheless, Rainbow DBS had one of the best booth displays at the recent Consumer Electronics Show. Top-notch management at Rainbow DBS and its parent, Bethpage, N.Y.-based Cablevision [NYSE: CVC] makes the venture worth watching closely.

      One key CES 2004 show announcement by Rainbow DBS was a new software distribution scheme from Maynard-Mass.-based Ucentric. The software, called the Voom HD Home Media Network Whole House Solution, is designed specially for HD programming. The new service will include a centralized HD DVR that records and plays back HD video programming in its intended format, allowing greater flexibility within the home. Voom’s CES presentation showed a subscriber tiring of watching an HD movie in the main room, pausing the programming to move into the bedroom, then pressing “play” upon entering the bedroom to have the movie resume where it left off.

      Rainbow DBS, the newcomer on the DBS scene, also recently added several new channels, including Starz Encore HD West and Starz Encore HD East, Playboy TV, and The NFL Network. Those additions bring its existing line-up to 30 total channels. In addition to its original 21 exclusive channels, Voom earlier had signed up Discovery HD Theatre, Showtime East and Showtime West, The Movie Channel, and an adult pay per view offering. By early March, Voom expects to launch a total of 80-90 additional cable basic channels.

      Finally, many pundits have questioned whether Rainbow DBS founder Chuck Dolan is serious about Voom. There are a number of reasons to think he is. First, Dolan has permanently moved his office from the Cablevision headquarters in Bethpage, N.Y., to the Voom/Rainbow DBS building in Jericho, N.Y. Second, Dolan has launched many new – and successful – ventures during his career. Even at 77, he still seems to have energy left to do more. Moreover, looking at the recent auctions by the Federal Communications Commission of multichannel video distribution and data service (MVDDS) spectrum, Cablevision has been one of the pre-eminent minority investors in MVDDS ventures (along with EchoStar). That causes many observers to wonder if Dolan will add to his Voom spectrum with terrestrial MVDDS spectrum.

      And the Numbers, Please…

      Looking at subscriber numbers, DirecTV reported 12.2 million total year-end customers, considerably more than EchoStar’s estimated 9.4 million. The U.S. DBS industry totaled an estimated 21.6 million subscribers by year-end 2003. For the month of December, DirecTV added an estimated 153,000 net new subscribers, while EchoStar added an estimated 135,000, for a combined 288,000 net new subscribers during the key holiday-selling month. For the fourth quarter, the net new subscriber additions reached an estimated 745,000, a year- over-year improvement of approximately 50,000, or 7 percent.

      Jimmy Schaeffler is a subscription TV analyst at The Carmel Group, a publisher of industry databooks and newsletters and a consultancy based in Carmel-by-the-Sea, Calif. ( The company specializes in telecommunications, computers and the media. He can be reached by e-mail,, or by telephone, 831/643 2222.

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