The U.S. direct broadcast satellite (DBS) industry has had a marked advantage over cable since it was launched in 1994.

The DBS providers emerged to deliver better pictures at a lower cost than their cable brethren. Today, that advantage is beginning to wane. Cable providers have a big, fast pipe into the home that can cost-effectively deliver video, audio and, now, broadband. The service currently arrives without even a quarter second delay to more than 16 million cable broadband subscribers.

The marketplace reality is that U.S. DBS growth is slowing due to competitive pressure from cable systems nationwide. These wired systems are beginning to offer broadband via effective, two-way cable modems. In addition, cable allows the bundling of a quality video/audio and broadband service from the same carrier. Such bundling of services is appealing to consumers swayed by the need to pay only one bill. Moreover, if a consumer cannot get the broadband service from either a telephone or satellite competitor, then the cable provider gains another key advantage.

Cable’s Strengths

Unfortunately for DBS, its broadband capability is restricted. In the satellite arena, the implementation of Internet and other broadband capabilities requires much greater costs, as well as more hardware and software development, to say nothing of higher prices for each system’s installation. With broadband tied closely to the effectiveness of a two-way infrastructure, the physical requirement of a satellite signal to travel 47,000 miles roundtrip causes an awkward delay in the send and receive process.

Cable does not suffer from this problem. Further, cable has a significant advantage over DBS when it comes to delivering broadband content that is best delivered instantaneously. At the very least, there is a quarter second gap in a signal traveling from the ground to a geostationary satellite and back to the ground. This gap is especially troublesome when the content involves voices and accompanying video. However, the latency problem also is troublesome when delivering interactive games and other content services.

Once cable begins offering local content services, it will have an additional jump on satellite TV.

DBS’ Advantages

Nonetheless, DBS is far from sunk. There still will be a hefty fight between DBS and cable well into this decade. The reason is that DBS does certain things very well.

For example, DBS provides great customer service. Last year’s J.D. Power’s award for top multi-channel customer service went to the two satellite TV service providers. DirecTV ranked first and EchoStar Communications [DISH] ended up second. In the two previous years, the order of finish was reversed but both still were at the top.

DBS also has a national footprint that avoids the market-by-market build-out of infrastructure that accompanies cable upgrades. Indeed, the most broadly dispersed cable system can be considered no more than a regional provider. As a result, each U.S. DBS duopolist is able to send a uniform marketing, hardware and software message to every consumer across the country. This consistent theme is important in a mobile society, such as the United States. Satellite customers have the freedom to move anywhere and maintain their existing subscription TV service provider.

In most instances, DBS can more easily invest in and broadly deploy new services, such as high-definition television (HDTV) and digital video recorders (DVRs), compared with cable. That edge for DBS is a pure law of physics due to satellite TV’s ability to deploy to a national audience. Conversely, as noted above, the strongest cable companies only can compete regionally. That means that DBS is likely to have an advantage in rolling out new advanced services.

Additionally, DBS can reach rural subscribers who have no access to cable. Only telephone companies are likely to present competition at some point to provide video services to these almost 30 million potential paying customers.

What Next?

Without modems and digital cable, the cable industry would have few answers to the quality and substance of DBS. In fact, digital cable and cable modems make up the subscription TV industry’s newest “killer application.” However, video-on-demand (VOD) offered by cable service providers has yet to approach “killer app” status and may never reach that level of consumer adoption.

First, what is the difference between satellite and cable? Other than broadband, DVRs separate the rival technologies and so far satellite TV providers hold that advantage.

Second, Hughes Network Systems’ satellite broadband SpaceWay project ultimately could help close the broadband gap with cable. However, SpaceWay has yet to launch and questions remain unanswered about its ultimate prospects. Moreover, SpaceWay initially is focusing on business users and the 17 million small office/home office (SOHO) customers. Since it is not targeting residences, its overall relevance to the satellite versus cable television landscape appears limited.

The Carmel Group’s recent analysis in SATELLITE NEWS (Jan. 27, 2003, pp. 4-5) projected that 2003 would mark the beginning of a dramatic shift for the U.S. DBS industry. The analysis predicted fewer new subscribers, higher subscriber acquisition costs (SAC) and customer programming prices, slower growth in average revenue per unit (ARPU), tightly managed churn, and, as noted previously, more competition.

In that vein, the Carmel Group projects a “cold scenario” of 1.8 million net new subscribers in the U.S. DBS industry this year. That pie will be shared 55 percent by EchoStar and 45 percent by DirecTV.

For January, the Carmel Group estimates total industry net new subscriber additions of 128,000. That total would consist of 71,000 subscribers for EchoStar and 57,000 subscribers for DirecTV. These January estimates account for a 48 percent decline for DirecTV and a 34 percent drop for EchoStar compared to January 2002. In fact, the January 2003 estimates reflect the lowest January subscriber gains in the past five to six years.

The chart entitled “3-Year Net New DBS Sub Growth” shows a clear decline. For the quarter ending March 2003, the total number of net new subscribers is estimated to dip 54 percent below the same quarter in 2000.

For the end of January 2003, recent estimated gains give EchoStar a 43.3 percent overall U.S. DBS market share. That share indicates a steady month-over-month gain on DirecTV, which now claims an estimated 56.7 percent market share.

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, Calif. (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.