Multichannel TV Shows Stiff Competition

By Jimmy Schaeffler, The Carmel Group

The North American multichannel market place has been a remarkably different place since DirecTV launched its first satellite on Dec. 17, 1993, and when it began service to U.S. customers six months later. Yet for all the change that has occurred in the pay-TV industry subsector during the past decade, expect a quantum leap forward during the next five years.

Competitive dynamics are in place that could cause large shifts in subscribers among various providers, changes in revenue sources, and stunning developments in products and services. U.S. satellite TV rivals will duke it with each other and their cable TV counterparts. Rather than maintaining the status quo, expect a tremendous shakeout of multichannel service providers.

Shanghai and Vegas

The Carmel Group recently was asked to deliver a keynote address in Shanghai, China, before a large multinational audience of people from the telecommunications and Internet industries. The talk, “Telecom/ Internet in the Year 2009,” was followed last week by a chance for me to moderate a panel discussion featuring five industry leaders at a National Association of Broadcasters Show (NAB 2004) show in Las Vegas. The discussion, “Trends, Trends and More Telecom Industry Trends: What They Mean To The Future Of Your Business,” combined with what was presented in China left me with the clear impression that digital is rapidly replacing analog globally. Correspondingly, digital quality is becoming the new mantra for global businesses and consumers. All three U.S. major DBS competitors – cable, telephone and broadcasters – are migrating quickly to digital standards while trying to tap the tremendous opportunities that come with it.

NAB Observations

Within a couple of years, the truest measure of multichannel competition will be the ability to provide the three-way bundled package of voice/audio, two-way Internet broadband and telephone services. Today, the best measure of the battle between the cable, satellite, broadcaster and telco entities is the video/audio part of the business.

One message that stood out at the NAB show is that broadcasters still have clout, legacy, momentum and deep pockets. Thus, it is outright wrong for anyone to claim “broadcasters are dying.” Instead, over-the-air broadcasters will adjust their business plans during the transition from analog to digital by introducing multichannel pay-TV options. The adaptability will take place in the same manner that broadcasting grew through the 1960s and 1970s to become the dominant mass media – and a recipient of ample advertising dollars.

One key trend highlighted by the NAB trends panel was the “coming of age” of new generations of consumers who were raised on computers and handheld phones. These young people form an important consumer base. Media companies will be adapting their business strategies to entice them. Such consumers will require different marketing strategies than will older, less technology-savvy generations. Sharp marketers will respond to these changing dynamics as they launch new business ventures and products. Close attention needs to be paid to trends in the competitive world of multichannel television and its ancillary industry subsectors, including interactive TV, digital video recorders, home theater, set- tops, and other hardware, gaming and software.

And The Numbers, Please…

For the U.S. satellite television market, The Carmel Group sees continued strong growth in the months ahead. A significant uptick in cable subscriber growth that we forecasted a year ago has been slowed by the continuing gains of DirecTV and EchoStar Communications [DISH].

In light of EchoStar’s March 11 and March 26 conference calls with Wall Street analysts, the U.S. satellite TV industry amassed a total of 21.6 million subscribers by year-end 2003. DirecTV remains the industry leader with 12.2 million subscribers, while scrappy EchoStar is a strong runner-up with 9.4 million customers of its own. As of the end of 2003, HDTV-centric newcomer Voom, a service of Cablevision-owned [CVC] Jericho, N.Y.-based Rainbow DBS, had signed up slightly fewer than 2,000 subscribers to its startup service.

On a percentage basis, El Segundo, Calif.-based DirecTV holds a 56.2-percent market share, while EchoStar trails with 43.8 percent. According to company reports, Voom has yet to develop a large enough subscriber base to meaningfully cut into the market share of either established provider. With a relatively entrenched base of 65 million cable subscribers and almost 22 million existing satellite TV subscribers, Voom will be challenged to make quick and significant subscriber gains in the months ahead. Voom also prices its hardware higher than the industry average, despite recently cutting the amounts it charges for receiving equipment. A competitive advantage for Voom, aside from unparalleled quantity of HDTV content, is that it is expected to become the first satellite TV service to upgrade to the MPEG-4 digital video compression standard. That move markedly should increase the number of channels that the company can provide to its subscribers.

As the accompanying charts further indicate, The Carmel Group estimates first-quarter net new subscribers for 2004 of 300,000 for DISH Network and 305,000 for DirecTV. This composite estimate of 605,000 is 20,000, or roughly 3.2 percent, less than the 625,000 in first-quarter 2003 and 72,000, or almost 11 percent, below the 677,000 subscribers collectively added in first-quarter 2002.

Net new subscribers added by both major players during 2003 totaled 2.44 million subscribers, consisting of 1.19 million for DirecTV and 1.245 million for EchoStar. This year- end net new subscriber figure is yet another indication of how, year after year for the past three or four years, EchoStar has been whittling away at DirecTV’s dominance. Another interesting set of U.S. DBS data points includes DISH Network’s 2003 churn of 1.57 percent, compared with 1.5 percent for DirecTV. This amounts to a DirecTV and EchoStar industry average churn for 2003 of 1.54 percent, well below that of cable and most other national subscription services. In sum, EchoStar and DirecTV are keeping their customers, in large measure due to new DVRs, HDTV products and services, good content and solid customer service.

Average 2003 revenue per unit for EchoStar and DirecTV, respectively, came in at $51.11 and $71.40. Together, the companies averaged $61.41. This figure is well above that of the rival cable industry, which mixes analog and digital cable subscribers.

Nonetheless, all is not financial bliss for satellite TV in the United States. Subscriber acquisition costs (SAC) for DBS are almost $500 for EchoStar and well above that for DirecTV. SAC for the cable industry averages significantly less. That situation points to a real competitive threat to satellite television from cable and other wireline competitors.

Jimmy Schaeffler researches, analyzes and writes this monthly report. He is a subscription TV analyst at The Carmel Group, a conference organizer and publisher of industry databooks and the monthly newsletters DBS Investor and Satellite Radio Investor. The Carmel Group, of Carmel-by-the-Sea, Calif., also provides media-related consulting services. More information can be found at www.carmelgroup.com, or by contacting Schaeffler directly by e-mail [email protected], or by telephone, 831/643 2222.