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A Fight on Earth and Up in the Sky

To expand services, EchoStar and DirecTV will need to expand their satellites, too 11/07/2004 07:00:00 PM Eastern

Seeking to get a competitive edge, the nation’s two top DBS providers are counting on new satellite capacity to spur their next wave of growth. The battle between DirecTV, now controlled by Rupert Murdoch’s News Corp, and EchoStar’s Dish satellite service is going to be a fierce fight.

Both are relying on new, more powerful satellites and extra orbital slots to deliver scores of local channels, high-definition TV channels, interactive services, international channels and other new features to subscribers. They’re also hunting for more satellites and slots as cable operators keep expanding their bandwidth by deploying digital, broadband lines.

In particular, the two DBS rivals are seeking greater capacity to offer more local broadcast stations and bandwidth-eating HDTV channels to their customers as high-definition TV sets stream off retail shelves into consumers’ homes. They’re aiming to catch up with cable operators, which have the capacity to carry more local stations and HDTV channels.

EchoStar, which reached 10 million subscribers last spring, has leased more orbital slots and satellites to deliver local channels. It offers nine national HD channels but still can’t deliver local ones, according to spokesman Marc Lumpkin.

Up in the sky, EchoStar owns nine satellites, leases space on two others, and plans to shoot another into space next year. It offers local TV service in 151 markets now and will boost that to 160 in 2005.

Cable worries about DBS in general but mostly about DirecTV, mainly because Murdoch owns other satellite services worldwide and because News Corp is such a tough competitor.

DirecTV has been particularly aggressive in increasing capacity this year, swinging a unique deal with Telesat Canada to use a Canadian orbital slot to beam down more local broadcast stations. The company owns eight satellites and will launch two more in 2005 and another two in 2007. As of now, it can provide local signals to customers in 130 markets.

DirecTV’s Spaceway satellites going up next year will expand its capacity for HDTV broadcasts. Company officials say the two Boeing Co. satellites, originally designed to deliver high-speed Internet access, will enable DirecTV to offer HD versions of 500 local broadcast stations nationwide next year.

“Expanding HDTV is going to be one of our most significant initiatives for next year,” says Bob Marsocci, a spokesman for DirecTV. Currently, DirecTV, the industry leader with more than 13 million subscribers, offers just four local HD channels and 15 national high-def networks.

Plans call for DirecTV to expand this total in 2007 when two other new satellites from Boeing are scheduled to go into orbit. Company executives say that this additional capacity will enable them to beam more than 1,500 local HD channels—essentially enough to hold all local stations’ primary signals, nationwide—and 150 national HD networks to subscribers.

Both satellite providers are signing up new subscribers at a quicker pace than last year, when they gained about 2.3 million net customers between them. At the rate they’re going, they should enlist more than 3 million subscribers this year, which would boost their total to nearly 25 million.

“Satellite has defied all my expectations,” says Josh Bernoff, a principal media analyst for Forrester Research Group. “The fact that growth is continuing is pretty amazing. We basically thought they were running out of people.”

Says Lumpkin, “The majority of our new customers come from cable. Our focus is to lure as many cable subscribers over as possible.” EchoStar just broke a new ad campaign late last month targeting digital-cable subscribers.

Analysts believe that the cable industry, which dominates the pay-TV universe with slightly fewer than 64 million subscribers, will retain the upper hand against satellite. Convergence Consulting Group predicts that cable companies will sign up 53% of all new digital subscribers this year, although that would be down from 61% last year.

“It’s not possible for the satellite companies to offer competitive broadband or telephone services,” Bernoff says. “If the cable operators finally crank up the phone services and lean really hard on HDTV and if they finally get people using VOD and finally push DVRs [digital video recorders], they could seriously slow down satellite growth and profitability.”

In this hotly competitive landscape, EchoStar and DirecTV are scrambling to stay ahead of cable operators and each other in deploying new technologies and services, especially HDTV and DVRs. With the holidays approaching, both satellite firms are sweetening their promotional offers to consumers.

EchoStar, for example, is handing out DVR-enabled satellite set-top boxes to new subscribers at no charge. The powerful new DishPlayer DVRs offer enough storage for up to 100 hours of TV programming.

EchoStar is also promoting an equipment offer that packages a 40-inch rear-projection HDTV set with an HD-enabled satellite receiver for $799, including free delivery and installation.

DirecTV and EchoStar are also upping the ante by delving more into interactive services. EchoStar now boasts 22 interactive channels, including customized weather forecasts, games, trivia, news, sports and fantasy-sports services.

DirecTV plans to start “mosaic” channels next year that will offer split-screen views of channels within certain genres, such as news, sports, weather and children’s programming.

In addition, the satellite companies are using their added satellite capacity to beef up their rosters of foreign-language channels. In early October, for example, DirecTV teamed up with Saigon Broadcasting Television Network to launch a 24-hour Vietnamese-language network.

One satellite-TV provider, however, is not sharing in the bounty. Voom, launched last fall by Cablevision Systems Corp., has struggled to carve out a niche as a largely HDTV service. According to an SEC filing in September, Cablevision said Voom had recruited just 28,700 subscribers through the end of August.

Cablevision also disclosed continued installation and equipment problems with its fledgling DBS service, particularly with Voom’s antennas. In the second quarter, Voom lost $81.5 million, dragging down Cablevision’s overall earnings. Industry experts aren’t high on Voom and hope it sells its orbital slots to a competitor like EchoStar.

But in a rapidly changing distribution universe, maybe Voom has a place. It’s a wide open universe for distribution.

DBS on A Growth Curve
Satellite is narrowing cable’s lead (millions of subscribers)
Cable 2002 2003 2004E 2005E 2006e 2007E 200
8E
2009E 2010E
E= estimated
SOURCE: Morgan Stanley's Richard Blotti
Total 64.4 64.4 63.8 63.5 63.4 63.4 63.5 63.6 63.8
Change -1.3% -0.1% -0.9% -0.4% -0.2% 0.1% 0.2% 0.2% 0.2%
DBS 2002 2003 2004E 2005E 2006e 2007E 2008E 2009E 2010E
Total 19.4 21.6 24.8 27.6 29.9 31.3 32.1 32.7 33.1
Change 12.8% 11.8% 14.9% 11.1% 8.3% 4.8% 2.5% 1.7% 1.4%
September
October