The ITV All-Stars Reunion and awards for leadership in interactive television at this month’s NCTA show was a downright raucous affair compared with some of the conference’s more staid sessions. Loud cheering and clapping erupted after each winner’s name was called out—until Rupert Murdoch was pronounced one of the seven winners. An awkward silence descended, and people looked around to see if Murdoch was actually in the room. He wasn’t. Instead, Dr. Dov Rubin, GM and VP of NDS Americas, a News Corp. subsidiary, accepted the award on Murdoch’s behalf. No doubt Rubin’s comments bolstered the interactive TV luminaries gathered that evening, a group that’s waited to see the promise of interactivity realized in the U.S. as long as Vladimir and Estragon waited for Godot. Rubin’s not exactly politically correct closing remark underscored what many in the cable industry believe: that cable’s network upgrades, which allow for two-way, high-speed Internet access and telephony, among other services, give it an advantage over satellite. "When it comes to interactivity, cable will kick satellite’s ass," Rubin said, an underwhelming vote of confidence for News Corp.’s plans for DirecTV, which will use interactivity as just one weapon in a steadily escalating battle to gain—and keep—customers. Had he been there, Murdoch, whose BSkyB direct-to-home satellite business in the United Kingdom brings in some $400 million annually through interactive applications, surely would have disagreed with Rubin, as would have Chase Carey and Mitchell Stern, part of the new executive team at DirecTV, which earlier this month surprised Wall Street by adding 460,000 net new subscribers in the first quarter. That figure beat some forecasts by more than 100,000 subs. Five months after News Corp. acquired a controlling interest in DirecTV parent Hughes Electronics for $6.8 billion, it is well on its way to remolding the U.S. satellite company. Hughes Electronics was renamed the DirecTV Group, and a new management team was recruited from News Corp. and Fox. Eddy Hartenstein, the longtime DirecTV exec, became vice chairman of the group. News Corp. sold PanAmSat (its 80% stake netted it more than $2.8 billion in cash), has key agreements in place for interactive programming guides and, in NDS, has a built-in technology arm. DirecTV now can turn its full attention to marketing its core satellite product. In the works are new suites of programming and services, from DVRs to interactivity to high definition. In short, DirecTV is focused as sharply as a laser on one goal: beating cable in the war for consumers’ loyalties. DirecTV is working closely with its News Corp. sister companies to develop new programming packages, with an emphasis on Hispanic and international programming. Only about 400,000 of DirecTV’s 13.6 million subscribers take any sort of international programming packages from the company, so there is plenty of room for growth. At the end of May, DirecTV will begin shipping a set-top box that features its new electronic programming guide. In the second half of the year, a DVR-enabled set-top with more interactive features will be introduced. Even with its late start on DVRs, however, cable has closed the gap with satellite in terms of DVRs in the field. By the end of 2005, cable will have deployed about 4.8 million DVRs, compared to 4 million for satellite, according to the Convergence Consulting Group, a Canadian research firm, although by 2006 Convergence expects satellite to have 9.5 million DVRs in the field, compared to cable’s 7.7 million. An ITV Future? News Corp.’s Sky satellite companies reap hundreds of millions annually from interactive applications, but it’s unclear whether the same business models will be successful in the United States. VOD and other interactive applications, once expected to be big revenue generators, are now being used more as value-added services to retain customers. In the U.K., more than half of the $400 million BSkyB brings in from ITV comes from its bookmaker arm, Sky Bet. Similar gambling services can’t be deployed here because of regulatory issues. Interactivity as a category "will be important to DirecTV," says Vincent Dureau, CTO of OpenTV, one of the largest providers of interactive technology. Interactivity comes in many shapes and sizes, he notes. Most people think of enhanced TV content— being able to view different camera angles, or checking out stats on a particular player, coach or team during a game, or, perhaps, following one player in a split screen while still watching the game. But other interactive categories are emerging, including commerce, customer support and games, Dureau says. OpenTV, a Liberty Media subsidiary, is working with sister company QVC to make it easier for customers to make purchases using their remotes, for example. A more pragmatic example is the automation of customer service functions, from answering questions to viewing and paying bills using the remote. "To our customers, that significantly reduces the cost of operations," Dureau says, and "has become very important to interactive television." As one platform introduces the technology, the other platform has to step up and introduce new and better services to compete, he adds, referring to cable and satellite. "We’re going to see an explosion of new services." It’s unlikely that DirecTV quickly will be able to duplicate the success in ITV that Sky has seen overseas. Satellite has dominated in the U.K. since the inception of digital TV, one reason for Sky’s success. U.K. digital TV penetration is more than 50%, according to Convergence, while just more than 12% have broadband Internet access. Here, far more consumers have broadband access, while digital growth is slowing somewhat at the 30% to 35% penetration range. "Interactive U.K. satellite TV predates any grand use of the Internet by years," notes Brahm Eiley, president of Convergence, "laying the groundwork for e-commerce, betting, information, etc. We see little evidence that the U.S. will see the type of success that U.K. ITV has seen for many years." Meanwhile, EchoStar, which has millions of its satellite homes enabled with interactive applications based on OpenTV’s technology, is counting on these new services to provide the glue that will help keep customers loyal. On the cable side, Charter and Atlantic Broadband, between them, have some 1.12 million Digeo ITV boxes deployed. A More Local DirecTV Analysts like what they are seeing so far from the new DirecTV management team. "In five months they’ve gotten a lot done," says Michael Hopkins, an analyst with Media Business Corp., which tracks the satellite industry. "They’re getting these big business items out of the way. This year we’ll see a lot of new and different things from the company." The company plans to roll out local broadcast channels in 42 additional markets within a four-week period beginning in June, when its DTV 7S satellite (launched a couple of weeks ago) becomes fully operational. That will bring the number of markets in which DirecTV offers local broadcast coverage to 106, or 85% of the U.S. market. After DirecTV receives FCC approval to make a slight change in the orbital position of another satellite, it will turn on another 24 local markets, upping its total to 130. (One condition of News Corp.’s purchase was that DirecTV offer local coverage in 130 markets by the end of 2004; at this rate it will be well ahead of that deadline.) DirecTV’s first-quarter results exceeded expectations—at cable’s expense. DirecTV president and CEO Stern told analysts that the company saw growth not only in certain markets where cable historically has been weak, but also in some of the bigger Comcast and Time Warner Cable markets. "The only markets where we saw any decrease was where EchoStar had local and we did not," Stern told analysts and investors on a May 4 conference call. The most impressive number in the quarter was the churn figure, says Bruce Leichtman, president and principal analyst at Leichtman Research Group. DirecTV’s churn was an average of 1.4% a month, lower than expected, and the company’s lowest churn figure ever. Stern attributed the low churn to the number of customers signing up for digital video recorders and multiple set-tops. (DirecTV customers had an average of 2.4 boxes in the first quarter, up from 1.85 in the first quarter of 2003.) "If they can keep churn down they are doing very well," Leichtman says. Getting a million subscribers is easy enough, he notes, but keeping them is another story. Analysts expect the trend of lower churn to continue. Citigroup Smith Barney analyst Niraj Gupta raised his 2004 and 2005 subscriber estimates based on the continued strong demand Stern said the company is seeing this quarter, historically a poor season for customer additions, as well as on the lower churn rates. He now expects 2004 gross subscriber additions of 3.5 million, up from 3.06 million. Based on his forecast of average monthly churn of 1.45%, he expects DirecTV to add 1.5 million net new subscribers this year, up from 1.09 million. Next year he expects the company to add 884,000 net new subs, up from 780,000. As Stern pointed out on the call, "we did not obtain these positive trends for free." DirecTV is investing in broadening its subscriber base, including getting as many DVR-enabled set-top boxes deployed as possible. DirecTV is now the No. 2 pay-TV service, behind Comcast. Within the next six to 12 months, customers will start to see new programming packages and new services, including interactivity, take off. The Battle of the Bundle Both DirecTV and EchoStar are scrambling for new spectrum capacity to deploy one of the hottest products in TV’s future—high definition. Cable operators are looking to reclaim analog bandwidth in part to deploy bandwidth-intensive hi-def; local channel HD will eat up even more. Satellite’s already strained spectrum is a major weak spot; that capacity constraint is a long-term concern for Wall Street, as analyst Gupta pointed out in a recent research note. The answer may lie in leasing arrangements with other satellite providers, or launching new satellites (at an eye-popping $250 million per satellite) that utilize the ka-band spectrum, although the satellite industry hopes to utilize that spectrum to offer two-way broadband. For now, DirecTV is offering local CBS HD feeds in the 16 markets where CBS owns and operates stations; analysts expect a similar deal with Fox. Even as DirecTV and EchoStar hammer away at these HD issues, they have partnered with regional telephone companies to fight cable’s triple-play bundles of video, high-speed access and telephone. Verizon and DirecTV have partnered in New England, New York, Texas and Florida. Bundles in the mid-Atlantic region will be turned on this summer. According to Convergence, the bundle offers TV at $10 to $20 less, Internet at $10 less and phone at approximately $10 or so more, on average, than what Cablevision, Comcast, Cox and Time Warner charge. However, notes Eiley at Convergence, "Once cable’s discounted triple play is thrown in, cable pricing comes down by $10 a month. Taking into account DirecTV’s $5 additional charge for receivers/outlets, as well as the fact that all these cablecos currently offer at least twice the [Internet] speed of Verizon, cable comes out fairly well." Referring to satellite’s previous failed partnerships with telephone companies, Stern said on the conference call, "This time we’re seeing real energy and a commitment by both partners to take on a common competitor." DirecTV will need all the energy it can muster to fight the cable bundle. In New Orleans, where Cox is the dominant operator, cable’s message is clear and abundantly evident on billboards dotting Interstate 10: three services—video, Internet and phone—one company, one bill, one discount. The danger for cable, however, is settling into complacency—and Rupert would like nothing more than to face a smug competitor.