The satellite-broadcasting industry has found a potential political ally in the form of its rapidly growing customer base, said Richard DalBello, president of the Satellite Broadcasting and Communications Association (SBCA).

With key legislation for the industry before Congress, a bit of additional political clout could be quite useful. A solid first quarter of financial results from the major U.S. satellite-TV and satellite-radio operators show that they all are delivering the kinds of subscription services that consumers want and are willing to buy, DalBello told attendees at a Media Institute luncheon Thursday in Washington, D.C.

“It’s pretty simple really – satellite companies are offering a great product at a great price,” DalBello said. “We are taking one of the world’s more complex technologies and putting it in the palm of your hand in a format that’s simple enough for your mother to understand. Perhaps most importantly – satellite services provide consumers with what they want most – a choice.”

DalBello — referring to a line from “Marketplace,” one of his favorite National Public Radio programs — told the attendees to “do the numbers” with him. Subscriber growth shows satellite-broadcasting companies are surging, he said.

“DirecTV, EchoStar [DISH], Sirius [SIRI] and XM Satellite Radio [XMSR] have all reported incredible numbers for the first quarter of this year,” DalBello said. The 420,000 net new subscribers notched by DirecTV during first quarter 2004 were “knock your socks off” impressive, he added.

“These monster numbers turned a lot of heads on Wall Street and raised [DirecTV’s] total to over 12.5 million subscribers,” DalBello said.

EchoStar produced 360,000 net new subscribers last quarter to put the company “within shouting distance” of the magic 10 million total subscriber mark, he added.

Not to be outdone by its satellite-TV brethren, the satellite radio industry is growing at an “amazing” pace, DalBello said. Sirius and XM each offer more than 100 channels, and all the music channels are commercial free.

“Satellite radio is an immensely popular new medium,” DalBello said. “Together, Sirius and XM now serve over 2 million subscribers. To date, the industry is experiencing an extremely low rate of consumer churn.”

XM Satellite Radio added 321,675 net new subscribers during first quarter 2004 – finishing the quarter with nearly 1.7 million customers, DalBello said. Sirius amassed more than 90,000 net new subscribers, a 138-percent increase from the company’s 2003 first-quarter performance. Within the past week, it topped the 400,000-subscriber mark, he added.

“These numbers show the tremendous demand that the public has for the creative, technologically forward-leaning services being offered by the satellite industry,” DalBello said.

According to the American Customer Satisfaction Index, approximately 71.5 percent of satellite television consumers are satisfied with their products and services, DalBello said.

“By comparison, Comcast [CMCSA], the nation’s largest cable company, had a customer satisfaction rate of only 55 percent in the first quarter of FY03 – that’s the same satisfaction numbers the U.S. Internal Revenue Service gets,” said DalBello, drawing laughter from his audience.

When asked after his speech how the sometimes-fragmented satellite-broadcasting sector could win support from lawmakers with scant lobbying clout or funds, DalBello said the industry’s growing popularity with consumers could be used to build its influence. Indeed, the technologies used by satellites to serve wide geographic areas and rural communities should make it “attractive” for lawmakers to support, he added, saying, “In many rural areas, satellite often provides the only medium for television, radio and broadband.”

DalBello’s address followed Wednesday’s Senate Judiciary Committee hearing on the Satellite Home Viewer Extension and Reauthorization Act, known in Washington, D.C., circles as SHVERA. DalBello said the satellite industry generally supports SHVERA.

“Prior to the Satellite Home Viewer Improvement Act of 1999 (SHVIA), DBS providers could not deliver local broadcast stations to consumers,” DalBello said. “This was bad for consumers, bad for local broadcasters and bad for DBS. When Congress realized this, it gave satellite carriers a license to carry local signals, and a partnership between DBS and broadcasters in providing access to local programming developed.”

Today, 90 percent of U.S. television households have access to the delivery of local broadcast stations from at least one DBS provider, DalBello said. In mountainous and rural areas of the United States, DBS is the only access consumers have to local broadcast stations.

Clashing Competitors

However, DirecTV and EchoStar differ on whether one satellite dish or two should be acceptable for delivering local channels into local markets for so-called local-into-local services.

In Wednesday’s hearing, Eddy Hartenstein, vice chairman of El Segundo, Calif.-based DirecTV Group [DTV], the parent company of satellite-TV service DirecTV, told lawmakers the legislation should clarify that satellite carriers may not “split” local analog or local digital signals in one market between two dishes. The “carry one, carry all” policy of the past that requires all local signals in a market to be offered if any of them are provided should be interpreted accordingly by Congress and written that way in the legislation, he explained.

In contrast, EchoStar Chairman and CEO Chairman Charlie Ergen told members of the same panel that Congress should not outlaw EchoStar’s two-dish plan for complying with its must-carry obligations or require an unrealistic compressed time schedule for transitioning local markets to one dish.

EchoStar appears to be the loser in this battle, because the powerful National Association of Broadcasters (NAB) and other influential trade groups weighing in on the matter support a one-dish solution.

Despite the two major U.S. satellite TV operators disagreeing on a key issue, DalBello said the satellite-TV industry has found common ground not only within its own ranks but with the representatives of broadcasters and other groups offering their views about the bill.

“Although this process has been complex, we are encouraged by the progress being made,” DalBello said. “There seems to be a strong interest in both houses in putting satellite on a level playing field with cable.”

Specifically, DalBello said, there seems to be consensus that Congress should:

• Maintain the licensed satellite retransmission of local signals.
• Preserve, for five years, the satellite compulsory license that allows the retransmission of distant network signals to unserved customers. However, the satellite industry should have a permanent license and copyright structure, just as the cable industry does, he added. “This allows them to stabilize their business and relives consumer anxiety. It is only fair that satellite carriers be treated in the same fashion as our competitors,” DalBello said.
• Give satellite carriers a license to provide out-of-market, significantly viewed stations to the same viewers as does cable.
• Extend the requirement for good-faith negotiations for retransmission consent for local-into-local.
• Keep the prohibition of exclusive contracts between broadcasters and multichannel video program distributors.
• Harmonize- at some point in the future – the distant network and superstation royalty rate structure for the satellite TV sector with those of the cable-TV industry.

“Although we seem to be together in principle, we do have some anxieties about this last issue,” DalBello said. “The current House Judiciary bill would start by raising our rates to reflect a cost-of-living adjustment since 1999, and then require the Copyright Office to convene a Copyright Arbitration Royalty Panel (CARP) to determine the ‘fair market value’ for the content.”

History is not on the satellite industry’s side when it comes to CARP decisions. In 1997, a similar mandate increased satellite’s royalty rates by 350 percent. The rates were re-adjusted downward by Congress a year later to make them feasible, DalBello recalled.

“This system just doesn’t work,” DalBello said. “We think adjusting for inflation is appropriate and sufficient. By comparison, cable rates are evaluated every five years and adjusted for inflation only.”

As part of the re-authorization, the SBCA has been advancing a proposal on the so-called “digital white areas” to allow DBS providers to offer network HDTV digital service to viewers in areas who cannot receive them, DalBello said.

“This would help to create a greater demand for HD sets and HD programming, and accelerate the national transition to a HD digital future,” DalBello said. “It will also help to accelerate the date at which broadcasters’ analog spectrum must be returned to the government. Once returned, this spectrum can be auctioned off to wireless companies eager to offer next-generation phone and Internet services; and handed over to police and fire agencies that could utilize the spectrum for improved public-safety services.”

The primary argument against that proposal is that if the satellite TV industry is allowed to serve these households for a year or five years or a decade, these viewers will remain satellite customers at the expense of local broadcasters that currently cannot offer HDTV signals, DalBello said.

“To keep our customers, we have to earn their loyalty,” DalBello said. “We are willing to sit down to discuss how to manage the transition of these customers back to over-the- air HD broadcast.”

Broadband Battleground

Gary Arlen, president of satellite and broadband consulting firm Arlen Communications of Bethesda, Md., attended DalBello’s speech and took a less bullish view on the satellite industry.

“Growth has slowed on the satellite-TV side,” Arlen said. However, he agreed that satellite radio has a “great opportunity” to keep picking up new subscribers in large numbers.

On the other hand, Arlen took a much less optimistic view than did DalBello about satellite broadband. DalBello spoke highly of the chances for proposed consumer satellite- broadband service WildBlue to provide a competitive product offering in the $40-to-$50-a-month price range, using consumer equipment that would sell for roughly $300.

“This will serve to greatly increase the competitiveness of satellite broadband, making the service a true alternative to other broadband pipes,” DalBello said.

The National Rural Telecommunication Cooperative (NRTC), an early partner of DirecTV, is backing WildBlue both as an investor and a distributor of the service, DalBello said.

“As many of you know, NRTC represents the advanced telecommunications and information interests of over 1,100 rural utilities,” DalBello said. “Their investment in WildBlue is meant to ensure that satellite broadband services get to those who need it most.”

Despite DalBello’s positive view of WildBlue and its chances for success, the satellite-data business will be challenging in the price-sensitive consumer market, except in rural areas where there are no other options, Arlen said.

–Paul Dykewicz

(Richard DalBello, SBCA, 703/549-6990; Bob Marsocci, DirecTV, 310/964-4656; Steve Caulk, EchoStar, 303/723-2010; Gary Arlen, Arlen Communications, 301/656-7940)