At satellite television operators DirecTV Group Inc. and EchoStar Communications Corp. there is simply no rest for the weary.
After defying broad forecasts of their imminent demise in the face of cable operators’ package of services, the companies continued to post solid subscriber growth throughout 2006. The trick was still-superior video service that helped poach subscribers, boosted by a boom in homeownership in near-captive markets in rural areas neglected by the big cable companies.
But, after bidding the stocks higher earlier in the year, investors are again abandoning positions in the two satellite competitors. This time, cable is still seen as a threat, but a new challenger has arisen – phone giant Verizon Communications Inc.
Verizon’s new fiber-optic broadband service, or FiOS, added 203,000 subscribers in the latest quarter for a total of 1.1 million. Of those, 515,000 were also signed up to get TV through the fiber, a tenfold increase from a year ago.
“With Verizon now beginning to take a non-negligible number of subscribers onto it FiOS platform for the first time, (satellite) subscriber growth faces significant headwinds,” said Bernstein analyst Craig Moffett.
The new threat is not likely to be enough by itself to consign DirecTV and EchoStar to permanent status as niche players. But combined with the continuous onslaught from cable, the duopoly is in for tough times.
Satellite television operators have always been credited with having the best video quality and largest selection of programming. Cable companies, led by Comcast Corp., Time Warner Cable and Cablevision Corp., spent billions in the 1990s to upgrade their systems to deliver broadband connections that would allow for digital cable, and improved video. But it also marked a shift in cable’s favor, as it enabled the companies to offer both television and high-speed Internet service.
It also pitted the cable giants against phone companies like Verizon and AT&T, who had upgraded their wires to copper and could offer another version of high-speed Internet access, digital subscriber line, or DSL.
Meanwhile, DirecTV and EchoStar, which runs the DISH network, kept adding subscribers as rural communities grew. They even poached customers from cable by offering lower prices and unique programming, such as DirecTV’s NFL Sunday Ticket package of professional football games.
Last year, though, cable stormed ahead by offering a third service – Internet-based telephone. With the so-called “triple play,” the cable giants had the advantage of offering one bill for these three main household services.
The argument was that cable’s bundled services – offered for introductory rates of about $99 – would lure customers away from phone and satellite providers who could offer only one or two of the services. Cable numbers grew in 2006, but satellite didn’t lose too much ground. It still offered a superior quality of video and developed a growing loyalty among its users, although growth did slow.
A look at DirecTV’s numbers shows this is not the first time it has had a sharp and extended slowdown in growth. New subscribers rose steadily from 1998 to a peak of 527,000 in the fourth quarter of 2000, before skidding all the way to 181,000 in the second quarter of 2003. The figure rebounded sharply to 505,000 in the first quarter of 2005. It went as low as 125,000 last year.
The company reported Wednesday that it added 158,000 net subscribers in the second quarter, in line with analyst expectations.
But cable also had troubles in the quarter. The biggest players reported not just slower growth, but an actual reduction in basic cable subscribers. A primary reason, analysts said, was Verizon.
For the first time, Verizon signed up more subscribers to get broadband Internet service through FiOS than through the copper lines for DSL, or digital subscriber line.
The rise of Verizon poses a threat especially to the EchoStar and DirecTV because phone companies had long been thought of as logical partners for the two. With satellite’s superior video and phone’s ability to offer voice and Internet service, the combination would match up with cable’s triple play, analysts say.
EchoStar, in particular, has made some local agreements with small regional phone companies to offer broadband service. Its stock was boosted by rumors that AT&T, itself in search of a video product, might try to acquire the company. Those rumors have been dead for several months now, though.
One of the reasons is that there remain knocks on satellite’s video service. Cable has been able to boost average revenue per subscriber by offering video on demand and more high-definition stations. Because of technical limitations, satellite can only send – not receive – signals, forcing a workaround that limits its VOD service; and copyright problems are threatening to hamstring EchoStar’s offering of local HD stations.
The problems have been reflected in the two companies’ share prices. After a run-up last year, DirecTV has underperformed the market so far through July. EchoStar is ahead of the S&P 500, considered the most relevant gauge of the broader market, but recently has fallen back toward par with that index.
Moffett, the analyst, said the two companies remain solid in terms of cash generation, but there is reason to expect a continued slowdown in growth, making them less attractive investments.
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