All the sentiment at present in the evaluation of pay TV in the US, tends to be negative, except for the progress in fiber customers at Verizon, but this quarter’s figures from both DirecTV and EchoStar tell a different tale, one about the US passion for High Definition TV.
The DTH suppliers EchoStar and DirecTV are supposed to be at a huge disadvantage compared to networks that can offer triple, and eventually quadruple play ‘ such as Comcast plus Sprint’s Pivot mobile, and AT&T with its four way attack on TV from Homezone and U-Verse, as well as reselling both DirecTV and EchoStar’s Dish. But that’s not how things are working out.
When Rupert Murdoch took control of DirecTV the first thing he did was to sell off PanAmSat, after boosting its value by giving it ten year contracts to carry DirecTV. The $4.3 billion he got for the company meant that Murdoch had a war chest to drive up subscriptions in DirecTV and until about three quarters ago that’s exactly what he and his team did, averaging around 225,000 net adds every quarter for almost three years. The sudden change to trying to operate on a profitable basis rather than in customer acquisition mode, we put down to the fact that Murdoch and his News Corp empire was saying goodbye to DirecTV in a deal thrust on him by John Malone of Liberty Media. Net additions fell to half that level.
But now we can see from this quarter’s numbers that Murdoch was just changing stroke, and the commitment that he put into Boeing back at the end of 2004, weeks after the PanAmSat deal, is now bearing fruit with his promise to put 100 HD channels into every part of the US, which including local channels means DirecTV had to contract for 1,500 HD satellite streams, is now more or less on target for completion by year end, and most markets already having 70 HD channels.
This quarter DirecTV had colossal net additions of 240,000, mostly made up of over 1 million gross additions and a slightly lower churn rate, with over 50% of new additions taking HD and or DVR services, taking subscriber numbers up to 16.56 million. Actually DirecTV said that some 600,000 subscribers took HD during the quarter, but many of these were simple upgrades, a move that has risen its ARPU to $78.8 from $73 a year ago already.
In previous quarters the actual net additions were rising faster at EchoStar’s Dish but now DirecTV is back in the lead, as DISH numbers fell to just 110,000 net new subscribers comparing with 295,000 a year earlier bringing subscribers in total to 13.7 million. Again at the gross additions level there was a substantial fall of 54,000 gross additions that is responsible for some of that, plus an increase in churn to 1.94% each month, up from 1.76% a year earlier
Dish said that it believes its subscriber churn has been negatively impacted by increased competition, but also because people are unable to pay for Pay TV because of the economy, as well as increases in the theft of satellite signals. Like DirecTV, the DISH ARPU has risen and is now $66 against $63.3 a year ago due to higher equipment rental from increased penetration of equipment leasing programs, some increases in its HD offering and straightforward price increases.
That churn rate alone will take care of about 24,000 subs, and the 54,000 fall in gross additions, plus the 110,000 additions it actually managed, leaves us looking for why another 107,000 subscriber additions failed to materialize against this time last year. The market is telling us that it’s the lack of HD offering compared to DirecTV, but there will also have been an affect from the sub-prime mortgage problems in the US. DirecTV wisely weeded out poor credit risk customers from the mix back in 2004 and 2005, while Dish was happy to take them on, and this decision is perhaps beginning to backfire on Dish.
If we look at what AT&T is doing ‘ remember it resells EchoStar Dish network both on its own and as a component of its Homezone service ‘ as well as DirecTV, through the Bellsouth arm ‘ we see that it has reached 126,000 U-verse TV subscribers in service, up from 51,000 three months earlier; and that its total video subscribers, including satellite and AT&T U-verse, rose 215,000 in the third quarter to reach 2.1 million.
So that’s a rise of 75,000 U-Verse customers leaving 140,000 growth in DTH. If we assume a roughly 50:50 split of these between Dish and DirecTV that’s around 70,000 each.
If those net additions were taken away from EchoStar, that would leave it with perhaps the worse figures in its history, net additions of just 40,000. So if AT&T decides after all to cut its relationship with Dish and to sell only one DTH service, and decides after all on that being DirecTV, not the more predictable Dish option, a move it has alluded to as happening early next year, Dish could suddenly hit a very hard wall.
The alternative is perhaps worse, that AT&T will continue to pursue Dish, but will discount its price based on the amount of business that is currently coming from AT&T customers, and on this poor performance.
We know that EchoStar has been paving the way to split itself into two companies, but there is no breakdown in its quarterly figures to suggest how this quarter broke down in terms of revenues for Dish and separately for the newly formed EchoStar Technologies Corporation
EchoStar lost 18% of its market value overnight at all this news, and is now valued at $18.36 billion, while DirecTV initially fell by around 8% merely on sympathy with EchoStar, despite excellent figures.
Meanwhile the success at DirecTV has gradually begun to move south of the border, to DirecTV Latin America, which had highly improbably success in the region, with 161,000 net additions and revenues up 67% to $442 million and churn down to just 1.4%. Pay TV services in Latin America have never churned that low, and this must be considered something of a breakthrough in the region, with subscriptions growth in Brazil, Argentina, Colombia, Venezuela and Mexico.