As the results season draws towards a close, it is perhaps worth noting one key milestone, with EchoStar’s Dish network overtaking Time Warner Cable in terms of the number of customers it has, making it the third largest pay TV operator in the US, behind Comcast and DirecTV.
EchoStar reported revenue of $2.76 billion up just 11.9% with net income of $224 million substantially up on the $169 million it did last time, and recording 13.58 million customer homes with the addition of just 170,000 net new subscribers.
Like DirecTV, EchoStar’s Dish network is actually slowing down its customer acquisitions over previous quarters, and was topping out at around 225,000 additional net new subscribers, but it remains a growing force. There are obvious question marks over whether or not it will continue to prosper once AT&T’s merged operations select a single DTH supplier to get behind, but we continue to believe that it will be Dish rather than DirecTV, since it is integrated into AT&T’s Homezone second string TV offering, which is mopping up customers ahead of the availability in major markets of the U-Verse IPTV platform, which is still slowly picking up speed after three years of planning and build out.
By comparison Time Warner Cable (TWC), freshly independent from its Time Warner parent, now has just 13.4 million customers, and that’s including the new systems is acquired through the takeover with Comcast of Adelphia out of Chapter XI.
The results of Time Warner carry an investment warning that the DTH suppliers, as well as RBOCs, plan to offer services that provide features and functions comparable to its triple play in bundles similar to cable operators, and says that it expects intensified competition, referring to the recent DTH deal with the Sprint Clearwire joint WiMAX network.
TWC also notes that it has its work cut out upgrading the acquired Adelphia systems to the level of the rest of its network and gets a lower average service revenue from these systems, and tells investors that its future strategy is to get more revenue across its base of existing customers, rather than growing its customer base. It also notes that programming margins are declining as the operator market becomes a sellers market, with reduced buying strength for all but the very largest players. Does EchoStar now have better content buying power than TWC? It must at least today be its equal, and have far better terms than the RBOCs.
Today TWC has an average revenue across these customers of $94 per month offering internet access and digital voice services on top of TV, plus VoD, subscription VoD, not to mention music and games, while EchoStar’s average is closer to $68 per month for just TV.
It’s as sure as night follows day that both the RBOCs and the DTH suppliers, over the next three years, will become a major force not only in these key three services but in mobile voice, and even mobile TV and other mobile services, diluting the Time Warner Cable customer base and driving down its service pricing in order to halt the continued growth of DTH TV.
US observers for the most part continue to think of cable as the innovation engine that drives the triple play, and it may have initiated the war against the RBOCs, and has plans to move to a quadruple play with the arrival of Pivot, the joint venture with Sprint offering mobile services on its CDMA network. TWC now has 7.2 million internet customers, and has grown its digital voice customer base now to 2.3 million.
But if we picture things three years down the track, there will certainly be less cable customers in the US, because the growth of the other two sectors must come from somewhere; the remaining cable customers will each be spending less, and EchoStar and DirecTV combined are likely to measure their internet customers in millions and their VoIP services in similar numbers.
In markets like this there is a tendency for investors to look for consolidation and cost cutting, and Comcast in our view has to mount a continuous campaign to acquire as many of the smaller US cable players, until it is left with one last cable operator to swallow, in TWC. The same thing has already happened in the RBOC market, and naturally the DTH supplies are likely to come together, and given their antipathy to the RBOCsnow they are in the IPTV business, create a third tier to rival the RBOCs and cable.
The timescale for this is perhaps the time it takes for Sprint and Clearwire to complete the build out of WiMAX services, which is post 2009 and also post 2009 the 700 MHz spectrum will be harnessed and added to existing spectrum stockpiles to renew rivalry among mobile networks. Two years of aggressive marketing after that and the DTH suppliers will be where TWC is today in terms of voice customers such that in four years from now the US landscape will be unrecognizable, all of which is predictable from the milestone when the second and third largest pay TV operators finally become DTH suppliers.