On the merger block

Apr 7, 2003  •  Post A Comment

DirecTV, the nation’s largest satellite-delivered programming service, has been the center of a great deal of speculation over its fate for nearly two years. A merger bid by EchoStar was nixed by the government. Last week SBC Communications dropped out of bidding, leaving News Corp. as the primary suitor. TelevisionWeek editor Alex Ben Block and Senior Editor Chris Pursell sat down with DirecTV President and Chief Operating Officer Roxanne Austin and Senior VP, Programming, Stephanie Campbell, to discuss the state of DirecTV and its renewed competition with EchoStar.
TelevisionWeek: A lot of rumors are surfacing about a variety of potential suitors for DirecTV, including Mr. Murdoch making a $7 billion dollar bid. Any comments?
Roxanne Austin: We will not comment merger today. My job is to run DirecTV. And I can’t spell the word `merger’ anymore, because my job is really to focus on operating our business to the best that it can be, and I have to ignore what’s going outside of our company, which is outside of our control, and focus performance of this business. So when I took the job in July of 2001, I had to sort of raise my right hand and say, `I swear to never say the word “merger” or spell the word “merger,” but yet to run this business every day and focus on that.’ So that’s really the mantra of our whole company over the last 18 months or so.
TVWeek: But we can talk about EchoStar’s failed bid to acquire DirecTV. There were perceptions that EchoStar somehow got an advantage, got a little lead, during that period …
Ms. Austin: Let’s talk about the reality of that. The media had a complete misperception that EchoStar gained critical information about DirecTV during the merger process. We did not share sales and distribution or marketing plans. We didn’t share programming contracts. What we did share was cost structure; billing costs, customer service costs and subscriber acquisition costs. We are aggressively reducing our cost structure, and that information was helpful to us just in terms of where we needed to go to be at market or below.
TVWeek: Suddenly, EchoStar has gone from potential parent back to competitor. How are you dealing with the renewed rivalry now?
Ms. Austin: Well you know I don’t view EchoStar as the competition as much as I view cable as the competition. DirecTV is the No. 2 multichannel service provider in this industry, competing with cable every day. Well, we’re going after a high-quality, high-margin subscriber. Our satellite competitor has taken a different approach, advertising a $24.99-per-month package. We don’t cost more than cable. We’re a better price/value equation than cable, and our customers buy more product. For example, we have the highest premium pay penetration in the industry, at 140 percent vs. 70 percent to 80 percent for EchoStar and cable. We also have the highest sports penetration with NFL Sunday Ticket, which no one else can offer.
TVWeek: Considering all the distractions from the merger, what is your focus right now?
Ms. Austin: Well, the focus is pretty clear. When Jack Shaw, the CEO of Hughes, and Eddy-Ed Hartenstein-the CEO of DirecTV, asked me to take over the job of running DirecTV in July 2001, I had to first agree I couldn’t spell `merger,’ but secondly, my job was really to focus on improving the business of our business. We had a great product. We had a great customer base. We had a great brand. [But] the business side of our business wasn’t performing where it needed to be. So we had to undertake immediately steps to improve the performance of the business. We had to revamp our sales and distribution model, basically the business model by which we sold our product. We had to immediately revamp our cost structure. We had to look aggressively at stemming the issue of piracy and aggressively attacking that issue. And really focusing on customer service and our installation networks. From our customer service group to our sales and distribution group, to our marketing group, wherever it was, everyone had a focus, and it was reducing our cost structure, reducing piracy, improving our customer service, changing our business model.
TVWeek: And then the merger with EchoStar was announced?
Ms. Austin: Yes. That was announced in October of 2001. We said to our team, `Look, I know the first thing you’re going to think is what about me? Right? That’s human nature. That’s what everybody thinks about in a merger. We understand that’s what you think.’ And I could actually draw from personal experience because I’ve been through a very large merger. I was a partner at Deloitte & Touche before I came to Hughes and I actually specialized in mergers and acquisitions for a very long time.
TVWeek: What are your top priorities for 2003?
Ms. Austin: Our major priorities for 2003 are, No. 1, doubling our local channel markets by year-end; No. 2 is rolling out DirecTV DVR with TiVo, because we fundamentally believe without exception it is the most robust DVR in the marketplace. We basically took a timeout from the product last year, redesigned it. DVR is critically important to us this year, so you’ll see us advertise it aggressively
No. 3 is high definition and aggressively expanding our offering of high-definition programming, even though the HD market today is very small. But we believe that the HD universe will grow and rapidly, and we want to be front end of that technology as well. Our fourth priority is to continue to aggressively attack our cost structure, as we did last year. We’ll continue to improve our margins this year, improve our cost structure and grow on a profitable basis.
So from our standpoint, we are aggressively attacking every aspect of our cost structure, including programming, but everything about the business right now, we’re setting it up for tremendous success this year and even more success next year.
TVWeek: Where do you stand now with local stations? How many of the open markets do you have?
Ms. Austin: We’re in 52 today and we will be in 100 local channel markets by year-end, up successful launch of our next spot-beam satellite.
We are focused this year on continuing, improving the financial performance of our business but also focused on doubling our local channel markets, so last year with must-carry we had 51 markets where we launched a full must-carry.
This year we’re going to grow to 100 markets with local channels by year-end. We’ll be at 61 markets by midyear. By year-end, we’ll be in 100 markets with local channels, doubling where we are today, covering 84 percent of television households, or 90 million television households. Offering local channels is critically important, because if you don’t have a full complement of local channels in a given market, you’re not fully competitive against cable.
TVWeek: In March there were problems with ABC Family that have now been resolved. Are there any other retransmission problems down the road?
Stephanie Campbell: Clearly, programming is the largest cost in our business by far. And we have a duty, we believe, to our subscriber base as well as to our shareholders to control programming costs. We are the No. 2 multichannel service provider, and it’s very important to a particular channel for their ad support purposes to have our customers’ eyeballs on that particular channel from the ad revenues that they garner from it.
So we believe that we have to do what we have to do to control costs. And our subscriber base is large enough that we believe we should have the best pricing in this industry, save for one particular provider, which is Comcast.
What industry can you possibly be in where you can raise rates to the kind of levels that have been raised over the last several years and not have, ultimately have, a business model problem? So from our standpoint we feel very strongly that we will do deals that make economic sense for our platform and we won’t do deals that don’t make economic sense for our platform.
TVWeek: There’s a two-way street. They’re able to move certain kinds of attractive programming, say, to that platform-ABC Family in
this particular case-and the subscriber is saying, `Well, this is not the only place I can get this, so why don’t you have it?’
Ms. Campbell: Well, I won’t comment on any particular channels, but of course we understand a lot more about what channels our customers enjoy and how far we can go relative to any particular channel.
Our competition in cable has raised rates more than 44 percent since 1997. What business can you be in where that doesn’t have a negative effect? Well, cable has seen the negative effect, right? The poor service, the combination of compounded price increases, the customers defecting, and they’re defecting to DirecTV or perhaps our other satellite competitor, depending on which end of the market they’re on.
So from our standpoint, we look at it as we’re playing in this universe and we’re doing a really good job of taking share and continuing to improve what we’re providing to customers, which is great customer service at a great price/value equation. Then that’s what we’re all about.
Ms. Austin: I wouldn’t say that there are-I think you characterized it as `other problems.’ I don’t think we look at them particularly as problems. Every deal is its own unique situation. But another thing that we haven’t really talked about that I think our company can be proud of is that we set out to make good relationships with the broadcasters, and I would say that for the most part-in fact, almost without exception-every deal takes on its own complexities.
We have built good relationships with the broadcasters because we understood that we are actually sort of natural allies in many ways, and I think that that’s going to do us a lot of good in the future. And I feel very positive about that.