“Satellite radio was clearly the success story of 2004 [and] the story of 2005 will be Fixed Satellite Services (FSS),” said David Kestenbaum, senior analyst of satellite, cable and broadcasting at IRG Research, to kick off the “Wall Street Speaks; Satellite Companies Listen” panel March 22 during the Satellite Finance section of the SATELLITE 2005 conference and exhibition. His comments set the stage for a discussion that focused primarily on the consumer satellite services–direct-to-home (DTH) satellite television and satellite radio–but also examined some of the other recent developments, namely the recent performance of the Panamsat initial public offering.

Kestenbaum noted that much of the satellite radio’s success was driven by an aggressive move from both Sirius Satellite Radio and XM Satellite Radio to expand their respective content offering.

Other panelists during the session echoed Kestenbaum’s enthusiasm about the growth prospects of satellite radio moving forward, though John Stone, representing the boutique investment house Near Earth LLC, noted that satellite radio, while enjoying a lot of success particularly in the early adopter community, “has not faced a lot of threats” in terms of competition. Stone said the satellite radio operators will be facing challenges going forward with what he described as “the iPod generation.” He noted that the popular Apple portable MP3 player is starting to be used in cars and could challenge the commercial-free music portion of the satellite radio business.

Sean Butson, a principal at Legg Mason, took a different view on the future of the satellite radio market. Right now, he noted that the core of the satellite radio market is tied primarily to automobile manufacturers, since radio is most used in the automobile. But Butson pointed to a larger pool from which satellite radio will be able to draw future subscribers: the mobile phone community. He noted that technology developments, particularly by XM, could allow the phone to also double as a satellite radio receiver, opening the market of possible subscribers to just about the entire population of the United States.

Satellite TV Growth Ending?

2005 will be the “the last easy year for satellites” competing against cable, Thomas Eagan, vice president of Oppenheimer‘s subscription TV research group, told the panel discussion attendees.

Eagan attributed the predicted slowdown in DTH’s taking market share away from cable to a variety of factors. He noted that, by the end of 2005, the DTH providers would have just about completed their rollouts of local channels. Eagan added that one of the competitive differences between satellite and cable–DTH providers offering of personal video recorders (PVRs)–has gone away as many of the cable companies now offer that service, as well as on-demand services that satellite companies do not presently offer.

Eagan added that cable is catching up to satellite television in terms of offering high-definition content. In addition, satellites could face new competition from telecom providers, as they continue to look to roll out video services. Eagan also pointed out that, while the telecoms offering of DTH services started out strong, subscriber growth from that channel has since weakened.

Stone described the current union between the telecom companies and the DTH providers a “marriage of convenience that is likely to turn into a messy divorce.”

But even with the competitive challenges that are surfacing for satellite television, none of the panelists were ruling off DTH as a viable competitor to cable. Both EchoStar Communications Corp., operator of the Dish Network DTH service, and The DirecTV Group continue to outperform their cable rivals when it comes to customer service and price, and that will keep the DTH companies competitive going forward.

However, no one was giving the same positive prospects to the third competitor in the DTH market right now–Rainbow DBS, which is currently operated by Cablevision and does business under the Voom brand name. Eagan was quick to note that Voom, which Cablevision Chairman Charles Dolan is trying to keep afloat, “does not stand a chance.” He said that while its offering of strictly high-definition (HD) programming was a novel idea at its inception, it is a “flawed idea” at this point and will go away, though its legacy could survive if EchoStar, which signed an agreement to purchase Voom’s sole in-orbit asset, looks to add some of the unique content that Voom currently offers to its less than 50,000 subscribers.

Questions On FSS Future

The future of FSS in the public markets became a bit cloudier last week when Panamsat’s IPO sold below its initial target offering and has failed, thus far, to trade at or above the initial $18 per share sale price. (At press time, the stock was trading at $17.06.)

Kestenbaum said the selling price could be a reflection of concerns about the payment of dividends to Panamsat’s private equity owners from the proceeds of the IPO.

Tom Watts, managing director of telecom, data and satellite services equity research at SG Cowen & Co. LLC, added that growth in the FSS sector is still “a big uncertainty” at this point.

–Gregory Twachtman