Last week was not a good one for the U.S. DBS industry. Faced with competitive, spiraling bids, DirecTV and EchoStar abandoned their joint bid for broadband wireless spectrum in the FCC’s AWS auction. Getting a hold of those licenses would have been a clean path to building a two-way terrestrial network capable of offering high-speed data and voice services.
Now, it’s up to the two satellite TV providers to cut a deal with a third party that does have the capability of supporting the last two components of the triple-play voice-video-data bundle.
On the heels of this disappointment, EchoStar received a blow in the form of a U.S. District Court ruling in Texas that ordered the company to disable its DVR capability — a result of a patent lawsuit filed by Tivo. Although that decision has been temporarily stayed, an appeal could lead to years of uncertainty for EchoStar, years during which DirecTV and cable companies could exploit EchoStar’s competitive handicap, driving the company to bankruptcy…or into the arms of DirecTV at fire-sale prices.
At risk for EchoStar are nearly four million of its DVR-enabled customers. The potential loss of these customers could be compounded by another legal loss. In May, the U.S. Circuit Court of Appeals in Atlanta upheld a lower court decision that found that EchoStar was importing broadcast network signals into small markets where no comparable local signals existed in violation of U.S. copyright laws. The lower court, following a directive by that appeals court, ordered EchoStar to stop the illegal importation of distant signals by September 11, a move that could alienate up to 800,000 of EchoStar’s customers.
All of this turmoil comes against the back-drop of a sharp slow-down in growth for the DBS providers. During Q2 06, the two companies combined added the lowest number of net new customers since at least the first quarter of 1999, a growth sputter that has been coming on for at least a year.
As the chart above shows, during Q2 06, EchoStar and DirecTV added only 320,000 net new customers, 60,000 less than their previous low water mark in Q2 05, when the two added a combined 380,000 net new subscribers. At the mid-way point in 2006, the two companies have added a combined total of 799,000 net new customers, down 34% from the 1.2 million net subscriber gains during the first half of 2005, which in turn was down 25% from the 1.6 million net new subscribers gained during the first half of 2004.
Although both companies point to tightened credit policies which weeded out late and non-paying customers, in truth cable has a potent combination of modem, VoIP and digital cable services which is responsible for this growth drop. And, it’s going to be tough for EchoStar and DirecTV to turn things around anytime soon.
Even if DirecTV buys EchoStar (a big if given that the antitrust authorities has once before blocked such a merger), and even if DirecTV cuts a deal with some other broadband wireless provider such as Craig McCaw’s Clearwire, video customers are flocking to cable’s triple-play packages for the convenience and cost-savings of buying voice, video and data services in one fell swoop. Once customers are lost, it’s awfully hard to get them back again.
Moreover, as Verizon and AT&T ramp up their own network-based video services (FiOS TV in the case of Verizon and Uverse in the case of AT&T), the telcos are going to be less interested in pushing the awkward satellite-based services that currently fill the video void in the telcos’ attempts to piece together a triple-play offering.
Do these trends mean that DBS is dying? Maybe, but the more immediate question is whether and when DirecTV and EchoStar will stall in growth altogether. Each company is paying over $600 per new customer in acquisition costs and unless they hike up the amount of money they are willing to spend to continue growing, an unlikely proposition that would rapidly lead to rising losses, something’s got to give.
Cynthia Brumfield at 2:57 PM|Comments(0)
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