by Marc Crossman

If only two companies were left facing a much larger, very powerful common enemy, one would think they would direct all resources at attacking the opponent, rather than fighting each other. Apparently, the opposite is true in the U.S. direct broadcast satellite (DBS) sector, where no love is lost between the remaining two operators, DirecTV and Echostar.

At the recent SBCA convention, the proverbial expression, "the tension was so thick you could cut it with a knife" was an apt description of the prevailing atmosphere. Echostar’s Charlie Ergen was quite vocal in his criticism of DirecTV’s recent deal with the NAB, a deal that will influence the way the pending DBS legislation takes shape. Ergen’s chief complaint is the fact that the deal was made without any input from Echostar. Such sparring is surprising, to say the least. Now that consolidation in the DBS industry has been completed, the competitive landscape has been altered significantly. As a result of the upcoming legislation, the multichannel market is now one large sector, and the method of delivery no longer excludes certain types of content. This satellite legislation promises to allow local-into-local broadcasting, meaning DBS will have the capability and the strength to compete with cable on an even footing.

With the playing field leveled, the two U.S. DBS players should concentrate their efforts toward stealing market share away from cable, rather than from each other. With 67 million cable households, the next one to two years will provide the remaining two DBS operators with a tremendous opportunity to expand the DBS market and significantly increase their subscriber base. Beyond the two-year timeframe, however, DBS’ digital advantage will wane as cable modems become mainstream. Thus, it is crucial that the DBS industry takes advantage of the next two years to build up subscribers and fully develop itself as a true alternative to cable.

As a result of continuous record-breaking subscriber growth, consolidation and positive new legislation, both GMH and DISH stocks have been on an upward curve. Echostar, a DBS pureplay, has shot up almost vertically. Once DirecTV successfully executes the America Online (AOL) deal, GMH will have the potential to run up the charts. Being subscriber-driven businesses, both companies will continue to add value as long as they post strong subscriber growth, and the most natural source for growth is the valuable cable subscriber base.

For the past six months, both Echostar and DirecTV have been expanding their respective businesses. In addition to buying their smaller competitors, both have also struck strategic alliances with big Internet brand names. While DirecTV’s $1.5 billion deal with AOL is more encompassing than Echostar’s agreement with WebTV, both companies are taking a step in the right direction-that is, the broadband direction. Although DirecTV’s arrangement with AOL gives DirecTV a stronger link to the broadband market, Echostar is already in the market with an Internet/DBS set-top box that incorporates VCR-like options.

By developing a strong presence in the broadband arena, the DBS operators will be able to minimize the two-way advantage of cable modems. It is important that the DBS operators continue to direct the majority of their resources and efforts at developing relationships with broadband companies, forming alliances that will give them the opportunity to grow their subscriber base, and at the same time, increase the revenue per subscriber. It is by these means that they will be able to build the most value for the shareholder, and ongoing infighting can only undermine this effort.

Marc Crossman is a vice president at J.P. Morgan in New York City. These views are those of the author and do not necessarily reflect the views of the Via Satellite editors or J.P. Morgan.