Pegasus stock takes a dive

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DirecTV reseller Pegasus Communications saw its stock plunge 20% Friday after the company moved to slow marketing spending to acquire new subscribers.

Pegusus CEO Marshall Pagon said that subscriber acquisition costs were growing out of control for all DBS companies, north of $500 per new subscriber. (Pegasus spent $519 in the first quarter.) But new subcribers who face no installation cost are churning out at the rate of 20% or so a year, too fast for the company to actually make any money off them.

So while the company can show strong growth in its subscriber base and revenue line, Pagon said he, DirecTV and EchoStar aren't making any return on their investment in new subscribers. "Growth without a clear means to recovering the cost is no longer a credible business strategy," Pagon said. He wants to pull marketing spending back to $325 per new sub, where it was a three years ago.

Wall Street didn't buy the strategy. Merrill Lynch Marc Nabi said the strategy could be "disasterous", adding that "Pegasus' change in strategy is extremely positive for EchoStar Communications in the near term." - John Higgins

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