DIRECTV SUB GAINS ARE A PAIN

BY MAVIS SCANLON In the second quarter, DirecTV’s subscriber gains were cable’s loss. Forty percent of its gross subscriber additions, or some 253,000 customers, came from digital cable, according to DirecTV president Roxanne Austin. The satellite service netted 181,000 new customers in the quarter, a better than expected number that was in part behind the company upping its guidance for customer additions this year to 900,000 from 800,000 to 850,000. “Increasingly our customers are coming from having a digital cable experience,” Austin says. “I think what that says is we have a great product.” The stat also underscores the fact that satellite is gaining market share at cable’s expense — a fight that will only intensify when News Corp. completes its purchase of DirecTV, a deal expected to close this year. In its annual five-year Entertainment and Media Outlook, released in June, PriceWaterhouseCoopers estimates that total cable households will decline 1.1% between 2003 and 2007, to 65 million, while satellite households will grow 8.4%, to 27.5 million. “We do expect that overall satellite will gain share from cable,” says Stefanie Kane, a PriceWaterhouseCoopers partner. Satellite has a few big selling points, she says: generally lower prices than digital cable, increased carriage of local market signals and aggressive marketing, including offers of free installation for one or more set-tops per household. “Hurting cable has been the continued higher prices they have fortunately been able to command,” Kane says. As far as video is concerned, “satellite now has everything you could want from cable.” “If 40% of DirecTV’s gross additions in the latest quarter came from digital cable, then that’s got to be negatively affecting [cable’s] numbers,” says Jimmy Schaeffler, chairman and CEO of The Carmel Group. “Based on that information, I wouldn’t necessarily go out and sell all my cable stocks, but I wouldn’t be buying any either.” Still, satellite’s gains don’t necessarily preclude cable from showing strong results as well, Schaeffler says. “The pie is bigger, and if cable can upsell their existing customer base, they can make up for the basic losses.” In fact, the pie is bigger due to the advanced services MSOs are marketing, such as cable modems, cable telephony, VOD and high-end boxes with DVR or HD capability. But the overall video market is expanding at a snail’s pace. Growth in the multichannel video household is now limited to new households, Kane says. Last year new households totaled 2.1 million, the smallest increase since the advent of cable networks, she notes. PriceWaterhouseCoopers estimates the total number of multichannel households will expand 1.3% between now and 2007, to 97.1 million. That means cable and satellite will fight that much harder to gain new customers and keep old ones. On July 30, Cox Communications kicks off the second-quarter earnings season. Historically the weakest quarter for subscriber additions, analysts expect subscriber losses at Charter Communications, Comcast, Cox, Insight Communications and Mediacom Communications. One result of the battle between cable and satellite, exacerbated by heavier spending levels on advanced set-top boxes, has been that both services are paying more to get and keep customers. “The video business for satellite is a healthy, robust and growing business,” says Aryeh Bourkoff, an analyst at UBS Warburg. “I think the retention costs for both are going up, in the sense that it costs more to deploy higher-end boxes with HD and DVR.” Indeed, DirecTV saw its subscriber acquisition costs jump to $595 per sub for the quarter, from $545 in the previous quarter. Austin attributed much of the increase to a jump in customers taking multiple set-tops. Austin downplays the importance of cable’s advanced services, noting that most of DirecTV’s subscriber gains in the quarter came from large markets where MSOs are rapidly deploying digital cable. Of course, the satellite providers have swooped into several of those markets where digital was either late in coming, as in Cablevision’s New York City service area, or delayed because the plant was not upgraded, as in many of the former AT&T Broadband markets, such as Miami, San Francisco and Chicago. Bourkoff notes that satellite will at some point need a response to the cable bundle. “It’s clear to me that the satellite operators have a superior offering to cable providers in rural areas, with better pricing structures,” he says. “But the jury is still out on whether satellite can go it alone in urban markets that are more dense.” DirecTV is in talks with various telcos about a bundled DSL/video offer. Satellite was also early in the game with HD, and DirecTV has some 200,000 HD boxes deployed. An HD battle is brewing on the retail front, as cable operators horn in on an area previously dominated by satellite. Austin asserts that DirecTV’s established relationships with big retailers allows it to keep the upper hand. “We worked very hard to be positioned in stores to be sold along with digital sets,” she says. “Almost all of the time you see a feed from DirecTV.”