By Jimmy Schaeffler

EchoStar Communications [Nasdaq: DISH] is riding stellar subscriber growth and strong financial metrics to increase support for the stock among investors. For any multichannel provider, long-term growth trends and enhanced profitability are keys to sustaining stock value. The latest conference calls with management at EchoStar and DirecTV show that they are withstanding heightened competition from cable companies and continuing to grow. That positive momentum is no small feat in the face of a weak economy.

EchoStar vs. DirecTV

EchoStar Founder, Chairman and CEO Charlie Ergen and CFO Michael McDonald recently shared impressive first-quarter growth numbers during the company’s conference call with analysts. The company’s 350,000 net new subscribers during the quarter were 27 percent better than DirecTV’s 275,000 net new additions.

The most important subscription TV metric these days is the number of net new subscribers. Despite EchoStar’s advantage in the latest quarter, DirecTV’s 275,000 net new subscribers topped the company’s estimates by 80 percent. DirecTV activated 701,000 new subscribers during the first quarter to double the number of existing customers that dropped the service during the same period.

EchoStar’s average revenue per unit (ARPU) of $51.48 during the first quarter still trails the performance of DirecTV, but the gap is less pronounced than in the past. DirecTV’s first-quarter ARPU of $59.10 is no surprise because the company emphasizes attracting higher-income, less price-sensitive customers. With that difference in philosophy, DirecTV is expected to continue outperforming EchoStar on ARPU far into the future.

However, DirecTV spent more to attract each new subscriber during the quarter. DirecTV’s subscriber acquisition costs (SAC) hit $540, putting it 12 percent above EchoStar’s SAC of $479. Despite DirecTV’s emphasis on luring the highest quality subscribers, its average monthly churn of 1.5 percent during the quarter exceeded EchoStar’s average monthly churn of 1.36 percent. On an annualized basis, EchoStar’s churn rate registers 16.3 percent versus DirecTV’s 18 percent.

EchoStar’s Formula

During the recent conference call, Ergen identified three reasons for EchoStar’s continued success: 1) reducing churn, 2) limiting programming price hikes, and 3) delivering more local-into-local channels.

Ergen also discussed EchoStar’s agreement to lease an entire satellite from SES Americom that would operate at the prime 105 degrees West Longitude orbital location directly over Colorado and Kansas in the center of North America. The lease of the new satellite would allow the EchoStar DISH Network to provide consumers with more bandwidth to carry increased local-into-local, high definition TV and broadband/Internet/high-speed data services.

At The Carmel Group’s April 30 Satellite Entertainment 2003 conference in Monterey, Calif., Kevin Smyth, SES Americom’s senior vice president of residential services, highlighted the agreement’s strategic and financial importance for both companies. The new satellite will provide both Ku-band and Ka-band hybrid services. The 10-year EchoStar lease will bring almost $50 million to SES Americom’s bottom line.

Ergen was less sanguine about his company’s legal disputes. The one that has the greatest potential to cause financial harm is the so-called “distant network signals” case. EchoStar presently is pitted against several network broadcast entities in that matter. If the U.S. district court judge in Miami favors the remedies sought by broadcasters opposing EchoStar, a large percentage of the satellite TV service’s subscribers could be forced to turn off their EchoStar signals. Ergen said such an action could have a “material impact” on EchoStar’s financial well being. It is interesting that Ergen made such a statement at all and especially during a call with analysts.

EchoStar settled a separate legal issue last week with 13 state attorneys general over its marketing practices. The dispute involved advertising disclosures, customer relationship and similar issues involving EchoStar and its independent retailers. EchoStar reached an agreement with the state attorneys general to improve the company’s processes by taking steps such as recording customer calls for verification purposes. EchoStar has agreed to pay $5 million to be split among all 13 states and used at their discretion for consumer education, school improvements and legal costs. The states are: California, Colorado, Connecticut, Florida, Georgia, Illinois, Louisiana, Minnesota, New Jersey, New York, Ohio, Oregon, and Wisconsin. In another matter, EchoStar has gone to arbitration to pursue its claim against insurers for technical problems on board the EchoStar IV satellite.

Answers For Wall Street

In response to a query from a Wall Street analyst about whether consumers would incur extra costs for additional dishes needed for local-into-local service, Ergen said there would be no extra charges.

He also acknowledged that scheduling issues with a launcher had prevented the selection of a firm launch date for a new EchoStar satellite to be orbited at 120 degrees West Longitude slot above North America.

When asked about piracy, Ergen said EchoStar cannot solve the problem alone and that a broad industry coalition is needed. As far as competition itself, EchoStar’s unabashed philosophy is to attack the “weak underbellies” of its marketplace rivals, Ergen said. The strategy calls for EchoStar to compete in places such as San Francisco, where cable modems and DSL broadband have been slow to capture the market. Likewise, areas with strong cable competitors that are willing to market aggressively are not the best places for EchoStar to focus its expansion efforts, he added.

Ergen said that a combination of satellite TV and DSL may happen and noted that it might be a way to compete with cable modems that offer both video and broadband through a single provider. The potential to bundle DSL and satellite TV services is what led SBC Communications [NYSE: SBC] to consider buying Hughes Electronics [NYSE: GMH] and its DirecTV satellite TV unit earlier this year.

And The Numbers, Please…

DirecTV, after closing the first quarter with 11.42 million subscribers, added an estimated 76,000 net new subscribers during April. The company’s total installed base stands at an estimated 11.5 million through April. EchoStar, in turn, ended the first quarter with 8.53 million subscribers and added an estimated 92,000 net new customers during April. At the end of April, EchoStar’s estimated subscriber total hit 8.62 million.

Both providers together added 625,000 net new subscribers during the first quarter, and an estimated 170,000 net new subscribers in April.

Together, the DBS service providers have an estimated 20.1 million subscribers. They likely passed the 20-million milestone during the second half of April. At the end of March, EchoStar held an estimated 43 percent of U.S. DBS market share, while DirecTV served the remaining 57 percent.

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 newsletters DBS Investor and Satellite Radio Investor. The firm also is a consultancy based in Carmel-by-the-Sea, Calif. (carmelgroup.com). The company specializes in telecommunications (e.g., cable, satellite, broadcast and wireless), as well as computers and the media. He can be reached by e-mail, [email protected], or by phone, 831/643 2222.