Termination of the proposed merger between DirecTV Inc. and EchoStar Communications Corp. [DISH] ended another chapter in the competitive landscape of the U.S. direct broadcast satellite (DBS) industry.

Many now believe that the two companies will readjust their year-end and first quarter sights back to the basics of subscriber growth and their strategies for dealing with cable TV rivals. No longer will intense focus be placed on Washington, D.C., and the statehouses, but rather on America’s 104 million TV Households (TVHHs).

Energy now will be directed at maximizing the financial returns from these households by boosting average revenue per subscriber per unit (ARPU), subscriber acquisition costs (SAC), subscriber loss (or churn), and earnings before interest, taxes, depreciation and amortization (EBITDA).

Times Remain Lean

In a bad economy, people may tend to watch more TV, especially superior quality “pay” TV offered by cable and satellite subscription providers. The logic suggests that instead of plopping down $100 or more to take a family out to dinner and a movie, the same family today could stay home most weekend nights and watch high-quality TV packages.

On the other hand, there is little doubt that for some sectors of the population, when jobs are lost and money gets scarce, that subscription TV is turned off before the electricity and water. For most consumers, satellite and cable TV are still considered less important than the basic elements of cleanliness and survival. Subscription TV, for most, is still hard to define as a must-have utility. Thus, there will be subscribers who cancel and hurt the revenue of providers. Those losses tend to off-set any of the gains from consumers described above who “stay-at-home” on weekend nights.

When all is said and done, growth will take place and satellite TV will continue to exact subscribers from rival cable TV providers. Nonetheless, the economy and better cable services, products and quality will do their share, as well, to trim satellite growth numbers during fourth quarter and November 2002.

EchoStar’s Strategy

EchoStar undoubtedly will concentrate on keeping prices low as it introduces new advanced services to its consumers. This low-pricing strategy allows the Littleton, Colo.-based satellite provider to differentiate from wired services.

Important products will include interactive TV (iTV), High Definition TV (HDTV) and Digital Video Recorders (DVRs). Of these three, most emphasis will be on the area of DVRs, as EchoStar tries to distribute more and more of its set-top boxes with DVR built into them. Based upon our research, The Carmel Group estimates the U.S.’s Number One DVR provider, EchoStar, will have more than 600,000 DVR units in place by year-end 2002.

In the area of HDTV, EchoStar now offers most of its nearly eight million subscribers nationwide a set of four HDTV channels that represent a big chunk of the satellite provider’s over one hundred FCC-assigned DBS Ku-band channels. The four HDTV channels include HBO and Showtime, the two premium service providers, as well as a Pay-Per-View (PPV) movie service and the Discovery Theatre. Additionally, in 17 larger urban/suburban markets, EchoStar offers its DBS subscribers the CBS Television Network. As such, EchoStar claims it is the “Number One HDTV provider to the entire nation.” Talks are presently underway to add additional HDTV content, perhaps in the form of more sports and/or a service such as Mark Cuban’s HDNet.

EchoStar also plans to launch a new HDTV set-top box at the 2003 Consumer Electronics Show (CES) in Las Vegas during early January. This new set-top box will be a combination HDTV and DVR, offering an exceptionally large hard-drive on which consumers may store significant HDTV content for later viewing, pausing, and program-skipping.

DirecTV’s Strategies

Industry leader DirecTV, on the other hand, has a slightly different strategy. It is tied to finding the more profitable subscriber, and probably conceding greater monthly and yearly subscriber numbers to EchoStar. DirecTV instead focuses on a subscriber who will not churn and who has an ARPU of almost $60 or more.

In its DVR category, DirecTV is focusing on a realignment of its branding. DirecTV will now call its new set-top the DirecTV Digital Satellite Recorder, rather than the prior version known as the DirecTV Receiver With TiVo. The DVR service itself is now termed DirecTV Digital Video Recording, Powered By TiVo, versus the prior description, which was simply termed the TiVo service.

DirecTV officials envision satellite-delivered DVRs as a clear answer to cable’s Video-On-Demand (VOD) strategy to let a viewer have the head-end in his home and chose what he wants to download. Similar to EchoStar, there is not much new focus these days on iTV. Nonetheless, DirecTV states that many new channels will be offering some form of iTV functionality in the months ahead.

DirecTV’s three HDTV channels include HBO, Showtime and Mark Cuban’s HDNet. HDNet typically airs various sports (e.g., Major League Baseball and the National Hockey League), news, documentaries and specials. DirecTV owner Hughes Electronics Corp. [GMH] currently allocates transponder capacity for its three HDTV channels at the 119- degree orbital slot above Salt Lake City, Utah, parked at the equator. Like EchoStar, subscribers to HBO and/or Showtime premium services automatically receive DirecTV HDTV signals.

Unlike EchoStar, however, DirecTV itself does not include its own hardware vendor, but instead the GMH set-top box function is handled by another GMH subsidiary, Germantown, Md.-based Hughes Network Systems (HNS). Together with a significant handful of additional set-top vendors, such as Sony, Thomson and Hitachi, HNS’ HDTV receivers will be offered at highly competitive retail prices, more and more frequently.

Latest Subscriber Trends

Estimates by The Carmel Group for month-end November show the total U.S. DBS customer base ending just shy of 19.5 million total subscribers. These are broken into 11.4 million (or a 58.8 percent market share) for DirecTV, and slightly over eight million (and a 41.2 percent market share) for EchoStar. For November, The Carmel Group estimates, based upon market developments and historical data, that DirecTV brought in 110,000 (or 47.8 percent) of net new subscribers, while EchoStar enticed 120,000 (or 52.2 percent). Between them both, they added an estimated 230,000 net new subscribers during November 2002.

The Carmel Group now estimates 2002 year-end overall U.S. DBS net new subscribers will come in at 2.2 million to lift the U.S. DBS customer total to 19.746 million (or about one in five U.S. TVHHs). Year-to-date estimated net new subscribers for DirecTV amounts to almost a million, while EchoStar accounts for a bit over one million net new subscribers. The estimated total net new subscribers for the year of November 30, 2001 to November 1, 2002 comes in at just over two million, which is about 500,000 subscribers less than the prior year-over-year period. To date, net new subscriber growth for the industry as a whole records an estimated decline of 12 percent versus the prior equivalent period of 2001.

Jimmy Schaeffler researches, analyzes and writes this monthly report. He is a subscription TV analyst at The Carmel Group, a publisher of industry databooks and the monthly newsletter DBS Investor, and a consultancy based in Carmel-by-the-Sea, CA (http://www.carmelgroup.com). The company specializes in telecommunications (e.g., cable, satellite and wireless), as well as computers and the media. He can be reached at e-mail or at telephone number 831/643 2222.