DirectTV's falling starDBS supplier has dismal second quarter; rival EchoStar drops takeover bid 7/22/2001 08:00:00 PM Eastern
More than a year into General Motors' floundering dance to sell its best asset, DirecTV is still fading, with the DBS service again paring forecasts.
DirecTV's second-quarter results had Wall Streeters busily slashing their valuations and operating forecasts as DirecTV continues to misfire on all sorts of counts. Subscriber growth is plunging, churn is rising uncomfortably, and piracy is surging.
DirecTV estimated that 9% of its marketing is going to subsidize equipment for pirates who buy equipment from retailers but never actually subscribe, instead buying a hacked "smart card" authorizing decryption of DirecTV's scrambled signals.
But DirecTV pays retailers a commission not only for each subscriber but also for each for each piece of hardware sold.
Charlie Ergen, chairman of rival EchoStar, estimates that even more than 10% of the people buying DirecTV satellite receivers are pirating the signal, and it's starting to crimp the growth of his service materially. He said it's hard to compete against a service when subscribers can "buy it cheap, install it for free, then watch it for free."
Executives at DirecTV and parent division Hughes Electronics concede that they've been inattentive to the DBS service's operations as they've struggled to spark an auction to sell the company to News Corp.-backed Skyglobal.
"We have been distracted by ongoing negotiations, and our performance is unacceptable," said Hughes CEO Jack Shaw.
Still, the sales talks advanced. EchoStar last week dropped its plans to counterbid for DirecTV, although Ergen's moves were widely seen as an attempt to complicate the lives of two enemies, Murdoch and DirecTV. News Corp. executives said they hope to get a deal locked down by August, although they have been frustrated by their past dealings with executives of GM, which owns Hughes.
Lucky for Hughes shareholders. Without Murdoch standing by as a ready buyer, analysts believe, Hughes stock would be trading below $10 per share, not at $19. It was about $40 when Murdoch started negotiating with GM in March 2000.
"It's so ugly in there right now," said one analyst. "They better get a deal done, or this stock's heading south."
In the second quarter, DirecTV added just 175,000 subscribers. That's down 61% from the pace added last year.
Subscriber churn, which the company had expected to start falling from 1.7% toward 1.5%, instead rose to 1.9% monthly. DirecTV is losing customers at the rate of more than 2 million per year, all of which have to be replaced at a cost of $1 billion per year.