Some gains, no pain-yet

Cable execs report that, so far, there is little damage from invigorated DBS

Even though DBS can now do what cable does-deliver local broadcast stations to consumers-cable operators are not seeing satellite services denting their subscription levels. Yet.

The quarter just ended March 31 is the first full reporting period in which DBS operators DirecTV and EchoStar began offering the local affiliates of four major broadcast networks to their customers. Previously, DBS customers either had to hook old-fashioned rabbit ears to their high-tech digital satellite receivers or, in the case of an estimated 3 million homes, subscribe to both cable and DBS to get the stations in their area.

Certainly, the DBS companies are seeing stronger results since they started adding ABC, NBC, CBS and FOX stations to their lineups late last year. DirecTV says it added 405,000 subscribers during the three months ended March 31.

That's 33% more units than the 304,000 subscribers the company added during the same period last year. EchoStar wouldn't disclose its sub counts until it posted full financial results. But Bear, Stearns & Co. satellite analyst Vijay Jayant believes the company added 400,000 units to reach 4.1 million subs. That's 23% more than the company added during last year's first quarter.

But the gains aren't big enough to show up as pains for cable operators so far. Only Time Warner Cable has reported first-quarter results, posting internal subscriber growth of 1.8%. That's on par with the company's performance last year. Other companies that haven't yet posted figures weren't willing to disclose subscriber results but said they haven't experienced any sudden downturn. Comcast President Brian Roberts said his company is seeing its best basic growth in years.

Added PaineWebber media analyst Tom Eagan, who's hearing the same thing from MSOs, "I'm a little bit beguiled.''

That's because DBS companies fought so desperately to get access to the stations. DBS executives, particularly EchoStar Chairman Charlie Ergen, argued that their inability to get rights to distribute local stations was a tremendous disadvantage that stunted their growth in cities and suburbs. Cable industry ads heavily emphasized how subscribers switching to DBS could lose their local stations.

But the DBS companies successfully lobbied Congress to get access to the stations, and, in November and December, DirecTV and EchoStar started distributing the four network affiliates.

Markets range from the largest, New York, to the smallest, Raleigh, N.C.

Analysts estimate that 25% to 30% of the 12 million DBS subscribers also pay for some level of cable service in order to get local stations. That equates to 2% of cable's subscriber base that could flee quickly.

The damage may come later. The rollouts are relatively new. The local service started in a couple of markets for EchoStar and DirecTV in November and December, and not all cities have received service. EchoStar still has a few of its 33 targeted markets left to go. For its part, DirecTV, with less satellite capacity to devote to local signals, has completed the launch in its 22 markets.

Also, and perhaps significantly, The WB and UPN affiliates are absent from the packages.

A lot of EchoStar's growth could be coming not from cable but from existing DBS customers from the dwindling Primestar. That failed service was sold last year to DirecTV, which is pushing to convert those customers to its service. So far about 1.4 million of Primestar's 2.3 million subscribers have signed off, but DirecTV has picked up only 700,000.

Another factor is cable operators' deployment of digital and its fat packages of movie channels plus some "basic" channels. "The cable guys contend, where they're doing digital boxes, they've cut DBS' growth rates in half," said Sanford Bernstein & Co. media analyst Tom Wolzien.

Eagan is particularly interested in the results of two companies with heavy presence in Los Angeles: Adelphia Communcations and Charter Communications. That's largely because Los Angeles was among the first markets in which the DBS companies launched local service. But it's also a market of single-family homes, rather than apartments, and full of heavy entertainment consumers.

But also Charter and particularly Adelphia inherited some weak systems in the market in recent acquisitions. "Adelphia is only 550 MHz in most of its plant," Eagan said. The industry standard is now 750 to 860 MHz. "I am most concerned for Adelphia. I would have a similar concern for Charter." Both companies will disclose results within three weeks.