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Satellite May Be Reaching Plateau

May 8, 2006  •  Post A Comment

DirecTV Group’s first-quarter slowdown in subscriber additions is the clearest signal yet that the stratospheric growth of the satellite TV industry is running out of steam.

After a decade of fast-paced growth, largely at the expense of the cable sector, DirecTV is showing signs of topping out just as a reborn cable industry is gearing up to do battle armed with a three-product bundle of television, high-speed Internet and telephone services. The top satellite company, of which Rupert Murdoch’s News Corp. owns a controlling 34 percent stake, reportedly added 255,000 new customers in the first quarter (off 50 percent from a year ago) to reach 15.4 million subscribers.

Many analysts believe things could get even more challenging once Regional Bell Operating Cos. such as Verizon Communications and AT&T begin offering their own three-pronged bundle over the next few years.

“The satellite industry, I think, faces a very uphill slog from here,” said Bernstein Research cable and satellite analyst Craig Moffett. “It’s going to be harder and harder to win subscribers.”

This altered landscape comes at a particularly delicate time for DirecTV President and CEO Chase Carey, who is betting big that the satellite company can reach 20 million subscribers by 2010, even if it can’t match head-to-head the product mix being sold by cable.

Mr. Carey dismisses the notion that cable’s triple play will derail his company’s plans. He noted that DirecTV has relationships with the RBOCs to complement the Bells’ high-speed Internet and telephone services with DirecTV’s video product. He said he expects those relationships to continue to be strong even as the phone companies roll out their own video service, since it will take the phone companies years to fully upgrade their networks to offer video services.

“While we will see an impact, the impact will be at the margin,” Mr. Carey said.

However, in a sign that he clearly recognizes the competition has intensified, Mr. Carey appeared to hedge on an earlier goal of adding 1 million subscribers in 2006, saying during last Thursday’s first-quarter earnings call that the actual number might be shy of that mark.

The challenges now confronting DirecTV and rival EchoStar Communications represent a turning of the tables for both companies. Ten years ago satellite, with its all-digital network, was able to boast of offering more channels at a lower price than cable’s analog offering. Today cable has gone digital and has taken things several steps further. In addition to a more robust channel lineup, cable companies are offering high-speed Internet and telephone service as well as advanced services such as video-on-demand-all products that satellite operators can’t match.

“Cable’s ability to offer a triple-play suite of video, high-speed Internet and telephony services is appealing to consumers and allows a certain degree of price flexibility that satellite does not have,” Prudential Securities analyst Katherine Styponias said in a research note.

What’s more, even if DirecTV were to overcome its lack of a broadband product by either building or buying a wireless high-speed data provider, the company would still be at a competitive disadvantage to cable because the broadband product would operate on a network separate from DirecTV’s TV service, Mr. Moffett noted.

“Cable’s advantage in the triple play is not from the fact that it offers three products and satellite offers only one, it’s that they can offer three services on one network and the marginal costs of each incremental product is nearly zero,” Mr. Moffett said.