DBS Is Still Stealing Cable's Customers

DirecTV expects a 1M gain this year
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DBS was supposed to be maturing by now, but DirecTV shows no signs of slowing down in its ability to steal customers from cable operators. For the three months ended September, the DBS service added 326,000 customers, far more than the 206,000 added during the same quarter last year and better than many analysts had expected.

Many of those customers came straight out of the hides of cable operators.

For the full year, DirecTV is expecting to add 1 million subscribers, an 11% gain to 10.6 million. Another 1.6 million rural subscribers are sold through the National Rural Telecommunications Co-Operative and Pegasus Communications, but that base is shrinking by 200,000 subscribers this year.

DirecTV revenue increased 20% to $1.9 billion; operating cash flow before accounting for the cost of signing up new customers rose 26% to $856.4 million. Those hefty marketing costs, though, trimmed total operating cash flow to $234.8 million. Still, that's 14% better than last year.

According to executives at DirecTV and parent Hughes Electronics, a deal to sell control of the operation to Rupert Murdoch's News Corp. is on track and a recent delay by the FCC is routine.

DirecTV President Roxanne Austin said the company is gaining from increasing dissatisfaction with digital cable, which is supposed to keep customers away from DBS. "Today, 45% of our new customers come from digital cable," she said. Three months ago, that was running just 40%.

"We've got 326,000 net new additions in the third quarter," Austin said. When MSOs' financial reports start coming out in the next few weeks, she added, "let's add up how cable did in the third quarter."

However, the cost of acquiring those subscribers rose as well, with new customers seeking more equipment—and more equipment subsidies—when they sign up. Subscriber-acquisition costs (SAC) rose from $560 each to $590 each.

Austin blamed this quarter's SAC increase entirely on equipment subsidies. For example, DirecTV has been running a "3-for-$99" promotion, offering to install three receivers in a new subscriber's home. That addresses one of the major advantages of cable, which will lease set-top boxes for multiple rooms for a few dollars monthly. DirecTV has also increased the subsidies it offers for receivers incorporating personal video recorders.

The payoff comes in keeping subscribers longer. Austin said DirecTV is churning subscribers at a rate of 1.6% monthly (losing 19% of its customers per year). "If you look at a one-receiver household today, they churn at roughly 2% today. But a two-receiver household churns at 1.5% or better, and three receivers is less than 1%. We said earlier that a DVR household churns at 0.05% or better. Making those investments materially improves your economic profile."

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