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DIRECTV and EchoStar report sharp sub growth declines

By Phillip Swann TVPredictions.com

Washington, D.C. (August 10, 2005) -- For more than a decade, the satellite TV industry has been dishing it out, stealing customers from cable with a dazzling array of innovative features and services. DIRECTV and EchoStar, the nation's top two satcasters, each have amassed more than 10 million subscribers and done so at a breathtaking pace.

But there are signs that satellite's wild ride may have finally hit a roadblock. EchoStar this week reported that it added approximately 225,000 net subscribers in the second quarter, a 33 percent drop from the 340,000 subs it added in last year's second quarter. EchoStar CEO Charlie Ergen cited increased competition from telcos, cable and DIRECTV as one reason for the loss.

However, DIRECTV reported last week that its 2005 second quarter net subscribers dropped 45 percent to 225,000.

It should be noted that both satellite TV services also reported a profit for the second quarter despite the subscription dips. (Although the profits were largely the result of one-time tax and accounting benefits.) In addition, DIRECTV now has 14.7 million subscribers while EchoStar is at 11.4 million. The two companies are hardly headed to the poorhouse.

But the subscription drop shouldn't be dismissed as either a one-time occurrence caused by increased competition or a seasonal glitch related to consumer spending and interest. The satellite TV industry is facing three serious challenges, perhaps the most serious in its history:

1. Digital Cable

For years, many people purchased satellite dishes from either DIRECTV or EchoStar simply because they provided more channels than cable -- a lot more channels. In the 1990s, when cable carried 50 channels or less in most markets, the satellite providers offered more than 200. When I was publisher of Satellite DIRECT magazine in the 1990s, I commissioned Nielsen Media Research to conduct four major studies over three years, asking consumers why they were buying dishes. The number one reason in each study: more channels.

However, thanks to new digital cable set-tops, cable TV operators can now offer as many channels as the satcasters. Satellite's best weapon of the past decade has been taken out of its arsenal.

2. New Technology

In the last few years, there has been an explosion of new TV technologies, such as High-Definition TV, Digital Video Recording and Video on Demand. Both cable and satellite operators have struggled to find more bandwidth to add these new features. However, the battle has been more taxing for the satcasters because they beam their signals from satellites in the sky,which have finite capacity.

Consequently, DIRECTV and EchoStar have been slow of late to expand their HDTV lineups (although EchoStar did add 10 HD channels from Cablevision's Voom satellite service, which has been closed.) and they still do not provide Video on Demand service, which cable does.

DIRECTV is launching four new satellites over the next two years to add capacity for HDTV and other services -- and EchoStar promises to expand as well. But satellite's recent subscription dip could be a byproduct of the industry's current technology gap. More consumers now see cable as offering more choice, which used to be satellite's most attractive selling point.

And while DIRECTV is attempting to close this gap with the new satellites, cable operators are expanding their capacities as well -- and more cheaply than launching rockets in the sky.

3. The Law of Diminishing Returns

The satellite industry now has more than 25 million subscribers, but future growth could be limited simply because people can't get the signals where they live. Unlike cable, whose wires can bypass pesky obstacles such as trees and buildings, the satellite dish must have a clear view of the southern sky (where the satellites are positioned) to display the signals. Many consumers live in an apartment building with no place to install the dish or in a house whose southern view is blocked. They might want to get the dish, but can't.

The satellite industry has done a terrific job implementing programs that permit multiple apartments to share one dish. But the southern sky problem could become a larger one in the coming years as the industry tries to expand its base.

DIRECTV and EchoStar, of course, are aware of these three challenges, which explains why they are busily adding new services and investing in the infrastructure necessary to add even more. And the two satcasters have demonstrated extraordinary courage and creativity in the past when facing similar battles. They shouldn't be counted out, particularly when you consider that DIRECTV is owned by the deep-pocketed and resourceful News Corp. (Under the crafty Ergen, EchoStar has also baffled the naysayers.)

But the satellite industry may soon find that it can no longer count on rapid subscription growth -- no matter how much it spends.
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