According to Blum, the DBS companies are addressing the slowing growth without the need to dramatically restructure their business plans. “Some marketing tactics and packing strategies will begin to take priority over others, but there is no need to panic,” he says.
MPEG-4 enables DBS companies to deliver more programming in the available bandwidth, and in many cases, improves overall service quality as well, says Blum. “The triple play is potentially a genuine threat if the DBS companies leave it unanswered,” says Blum. “If DBS companies can gain licensed terrestrial spectrum that is suitable for WiMAX service or merge with a company like Clearwire or a mobile player that already has the spectrum, that is a potential pathway to a double or triple or even quadruple play. It is easy and cheap enough to integrate WiMAX technology into DBS antennae and set-top boxes (STB).” A solution devised by AT&T involving a DBS decoder and a DSL modem together in the same STB allows the use of both pipes to deliver services. “In theory, [this is] a triple play if it can be elegantly productized and seamlessly presented to the consumer,” says Blum.
Kishore sees technologies like 8PSK modulation, MPEG-4 and advanced turbocoding, along with a near on-demand digital video recorder (DVR) technology-driven strategy bearing fruit for the DBS sector. “Storage is getting cheaper, and compression is getting more efficient,” he says. “And a good interface, personalization tools and high value content will get you close to a network solution. If the battle was purely video, DBS can keep up. DirecTV in particular has a very well-defined HD strategy.”
Throughout the past five years, DirecTV has averaged about 13 percent of the overall pay-TV industry’s gross additions, and both internal and external projections indicate that this percentage will remain relatively constant throughout the next few years, says DirecTV spokesman, Robert Mercer. “Despite the cable industry’s introduction of digital video, broadband, video-on-demand, VoIP and other services over the past five years, DirecTV’s market share of gross additions has increased from 10 percent to 14 percent in that same time frame,” says Mercer.
With the triple play looming, DirecTV continues to play its trump card: HDTV. “We are the clear leader in HD sports programming with 110 NFL games in HD and MLB games in HD from 19 regional sports networks, and we will be offering NBA and NHL games in HD this season from the regional sports networks,” says Mercer. At the end of November, DirecTV offered local HD service in 45 markets across the United States with plans to roll out 22 more by the end of 2006. “In 2007, DirecTV will have capacity for 1,500 local HD channels and 150 national HD channels — more HD capacity than anyone else in our industry — providing a significant competitive advantage as demand for HD TVs is expected to increase,” says Mercer.
Based on forecasts from Kagan, the Yankee Group and Forrester Research, the consumer electronics industry projects that about 44 million U.S. homes, about 40 percent of all TV households, will own HD-capable TVs by the end of 2007 and that number will climb rapidly to 77 million households, or 67 percent, by the end of 2010. Add new video-on-demand offerings via a broadband hookup on a new HD DVR box, more robust interactive services, and the ability to move content throughout the house from PC to TV or from TV to PC, and DirecTV’s stance becomes more evident.
Mercer cites marketing agreements with Verizon, Bellsouth, Qwest and Cincinnati Bell in which the phone companies offer the DirecTV satellite-TV service as part of a bundle that includes telephone and digital subscribe line (DSL) high-speed Internet. These partnerships, which Mercer describes as, “tremendously successful in attracting new customers and competing against the cable bundle in their service territories,” remain strong and continue to contribute 25 percent of DirecTV’s gross subscriber additions, he says.
In June, DirecTV announced a five-year distribution deal with Wildblue as DirecTV’s exclusive satellite-delivered broadband Internet service, and this was followed in July with an announcement that DirecTV would deliver services over Earthlink’s municipal Wi-Fi networks beginning in Anaheim, Calif. “We have the option to launch in other markets where Earthlink builds out a muni Wi-Fi network,” says Mercer. “The capacity is purchased by DirecTV on a wholesale basis and sold under the DirecTV brand. We continue to look at other opportunities to deploy a nationwide broadband service to enable a compelling and competitive bundle of services and will invest in a wireless bundle solution when the technology and economics make sense.”
Dish Network recently launched Wildblue to provide customers in outlying regions with high-speed Internet access, and the company is partnering with other providers to offer Internet services in various regions. These partnerships give customers the ability to purchase Dish Network along with DSL or other phone services, says Jody Martin, Echostar’s senior vice president of marketing. “We have recently added Get Connected to our line of services allowing Dish Network operators to provide new customers with information about DSL and other high-speed offers in their area,” says Martin.
Dish Network’s iTV menu includes more than 40 different virtual and enhanced channels. “Our iTV offerings generate continuous feedback from our users …,” says Martin. “These are popular with brand name content providers who have joined the platform and are making their services interactive.”
But this litany of offerings from DirecTV and Echostar are yielding mixed results to date, says Blum. “Overseas, where BSkyB and others have been offering these sorts of services for much longer, they have proven popular,” he says. “Integrating DSL into STBs is not a cosmic solution for everyone, but it will provide DBS players with a competitive advantage or at least a competitive draw in many markets. Cable is getting better but not everywhere all at once. DBS can still do that,” says Blum.
“iTV will slowly gather more momentum with the development of interactive advertising,” says Kishore. “While iTV has had an impact, it has not really been a game changer. Even in the United Kingdom, while it generates significant revenue, I do not know if it has really been a huge weapon for BSkyB.”
Merger Speculation Mounts
Blum sees 2006 financial statements from both DBS companies as indicative of a mature industry that can continue to grow marginally at the expense of cable, “but the days of open-field running are over. My projections over the past ten years have always had growth more or less flatlining around the 30 million subscriber mark, which they are approaching,” he says. “They are running out of high-quality, high-TV consumption subscribers, which is what they need to support their high subscriber acquisition costs, among other things.” Blum expects both companies to focus on profitability and turn their businesses into cash cows. “That is the path the telcos took, and cable has tried too over the years,” says Blum.
Add it all up and a DBS merger may well be on the horizon, says Blum. “You often find cash cows at the height of their milking capacity at auction yards. That point is not too far away,” he says.
“Despite the differences between the two companies’ tactics and some small differences such as the technology used — the Tivo DVR, for example, with DirecTV — the services are largely redundant,” says Chanko. “Certainly, there would be enormous cost savings regarding duplicative back-office operations and perhaps even redundant satellites, since the two compete against each other and have similar footprints. With any satellite redundancy, there is a small chance to transform some of the transponder real estate into other revenue-producing operations that would not have to bear the cost of licensing programming from television networks,” adds Chanko.
Still, there is no guarantee that a merger will take place and win the necessary regulatory approvals in the process. In fact, the changing wireless landscape and the possible emergency of ancillary terrestrial components — now the exclusive domain of providers of mobile satellite services — may prove to be the big spoilers in the end.