Mixed Results for DBSers

It's expensive to acquire new satellite TV subscribers. Both DirecTV and EchoStar added hundreds of thousands of new subscribers in the most recent quarter, but both posted financial losses in the process.

Acquired a few months ago from General Motors, DirecTV is now firmly under the control of Rupert Murdoch's News Corporation. The direct broadcast satellite (DBS) operation, now known as the DirecTV Group Inc., added 460,000 new customers in the quarter, ending the quarter with 12.6 million subscribers.

The growth in subscribership was largely the result of marketing efforts prior to the acquisition by News Corp., according to analysts. Revenue was up 22% to $2.51 billion, but DirecTV posted a net loss of $638.8 million, a sharp increase over the $50.9 million loss reported for the same period in 2003. The loss was largely attributed to costs of acquiring new subscribers and to a $479 million loss on an impending sale of a controlling interest in satellite operation PanAmSat, which is being acquired by venture capital firm Kohlberg Kravis Roberts. The $3.5 billion deal will add about $2.8 billion in cash to DirecTV's assets.

During the first quarter, DirecTV also sold its interest in XM Satellite Radio, a move that brought in $387 million. The company is launching a new satellite that may give it increased presence in some markets, as well as rolling out new electronic programming guides. DirecTV's next generation receivers will have much-improved DVR functions, according to company executives. News Corp., the DBSer's new parent company, reported a 19% increase in revenue and a 69% increase in net income for the same first quarter, primarily on the strength of improved ad sales and efficiencies in its newspaper division.

EchoStar Communications Corp. also added new subscribers—360,000 of them—and also reported a loss for the first quarter ($42.9 million, compared with net income of $57.9 million, for the same period last year). Revenue was up 16%, reaching $1.58 billion compared to $1.36 billion a year earlier. The Englewood, CO–based satellite service reported average monthly revenue per subscriber was $51.76, a fractional increase from last year's $51.60.

CEO Charlie Ergen mentioned that the cost of acquiring new subscribers was $604 each, implying that customers have to stick with the service for well over a year before they become profitable for EchoStar. At the end of the quarter (March 31) the company had approximately 9.8 million subscribers. "There's really good momentum in the satellite TV industry," Ergen told reporters in a conference call, adding that he expects the two DBSers to gain a combined three million subscribers in 2004.

A development that may impact the bottom line for satellite broadcasters is the May 6 approval of a bill by a US House of Representatives subcommittee granting a 12% increase in fees that EchoStar and DirecTV would have to pay for programming in the coming year.

Sent for full consideration by the House, the bill also approves a gradual increase in royalties collected by the US Copyright Office and passed along to copyright holders. Rep. Rick Boucher (R-VA) predicted subscriber rate increases as a result, a conclusion that was disputed by his colleague, Rep. Lamar Smith (R- TX), sponsor of the bill. The "statutory licenses" that would be renewed and restructured by the bill expire at the end of this year.