With the continuing economic collapse, people in every industry are wondering how their particular sector will perform. In the satellite sector, there has been considerable opinion that satellite would do well. I believe that this is generally true, particularly in video distribution, where long contracts and growing demand will insulate the satellite industry from economic hard times. For the most part, the satellite industry is a necessary component of broader networks and will remain important, although its growth may slow. I agree with observers like Futron’s Peggy Slye that financing the next generation of commercial satellites may prove to be a problem.

There is, unfortunately, an exception to this overall assessment. Satellite services that depend on consumers directly for their revenue stream will not be sheltered from the current bad times. I have previously discussed the advantages of directly tapping into consumer markets and how satellite companies that do that can access a larger pool of consumer dollars. The danger in this strategy can be described by the phrase "high risk, high reward." By dealing directly with consumers you don’t have to share revenue as in a wholesale relationship, but when consumer spending declines there is nothing to mitigate these losses.

Looking at North America’s largest DTH provider DirecTV’s net subscriber additions, one sees a mixed picture. Net subscriber additions fell in 2008, because of a very bad third quarter (down 48 percent). The first, second and fourth quarters of 2008 all had higher net additions than 2007, with the best 2008 quarter twice as good as the best of the following quarters. Churn improved slightly in 2008, but again, the first half of 2008 had the good news while the third quarter was worse than 2007 and the fourth quarter the same as in 2007.

Average revenue per user (ARPU) growth also slowed during 2008, starting at 8.6 percent in the first quarter and ended at 3.5 percent in the fourth quarter — greater than had been forecast. Overall, ARPU growth in 2008 was 6.2 percent, down from 7.2 percent in 2007.

I do not mean to suggest that DirecTV is failing, as it has made respectable gains in all the above metrics. Indeed, most video providers are struggling with similar issues. The important point is that if all of these metrics continue to decline (which seems possible, even likely) they point towards serious problems ahead. There is no countervailing revenue stream to support satellite video providers as there is for other video providers who offer voice and data service over their networks or FSS satellite operators whose business is inherently more diversified.

The message is clear; growth is slowing for DTH video providers, but competition is not. As all video providers need to make their offerings more attractive, it is likely that (at least in the short term) they will increase, rather than decrease, their program offerings. More high-definition (HD) programming and more choices in other respects is the obvious response to competition, as can be seen in TV ads touting the growing number of HD offerings available on satellite.

A general increase in the amount of programming required by video providers also will boost the fortunes of video distributors like the satellite operators. The bent-pipe business will improve under these circumstances, although the price sensitivity of customers likely will in-crease as well. For DTH video providers, however, costs will rise and revenue growth slow and perhaps even decline. DTH companies likely will be forced to choose between maintaining market share and growing profits. Given it will be easier to increase profits in better times then to regain market share, all video providers are likely to see a decrease in revenue.

As the economy worsens, DTH providers may be particularly vulnerable due to their more limited offerings (video and not voice or data). In any case, revenue growth will likely be less robust for DTH providers than any other major portion of the satellite industry over the next few years. Broad-band and DARS companies will face many of these same issues, but their responses and their problems will be different in ways I will discuss next time.

Max Engel is and experienced satellite and telecom industry analyst and founder of The North Star Consultancy. He can be reached at maxengel@thenorthstarconsultancy.