by Jimmy Schaeffler

Since the first quarter of 1994, when U.S. Direct Broadcast Satellite (DBS) companies began to provide services to the U.S. public, a monthly average of almost 175,000 new DBS subscribers has been added to a U.S. base that totaled approximately 12 million as of January 1, 2000. The two remaining U.S. DBS operators–70 percent market share holder DirecTV and 30 percent market share holder Echostar–have already acquired 12 percent of the total U.S. TV Household (TVHHs) universe within an extremely short time frame of 69 months

From a total of almost 75 million subscription TVHHs nationwide, the two high-power players have grabbed more than 16 percent of that universe. On average, this amounts to almost 5,800 net new DBS subscribers per day. Moreover, their combined share of the compounded annual growth rate has measured 82.5 percent during this five and one half year period, and preliminary projections suggest that the U.S. DBS market share will grow to almost 30 million by year-end 2005. For 1999, The Carmel Group estimates DBS providers took in between three and four new subscribers for every one that cable added.

Nonetheless, as great a challenge as it has been for the surviving DBS industry players to build to this level, the future promises an even tougher road. This is because of two key factors that will deeply impact the future of satellite-delivered television services. First, U.S. cable will begin aggressively switching to digital services, which promise to offer the first true channel-per-channel competition DBS has ever encountered. Next, as part of that transition, wired service providers in the United States will quickly begin offering the kind of Advanced Interactive Multimedia (AIM) services that will determine the future of the subscription-based TV landscape for many years into the third millennium.

In order to keep developing its current robust rate of subscriber growth, DBS companies must continue to create value relative to the competition, as they have in the past. Thus far, DBS players have done this by delivering more video and audio services for the basic consumer dollar. In the future, DBS service providers will have to continue providing not only more video and audio services, but offer more AIM services, such as personal TV, Web access, and other enhanced TV capabilities, as well as two-way access via satellite.

DBS Years One To Six: David Smites Goliath

Since its true inception, when PrimeStar transferred its 70,000 analog DBS subscribers to digital services in the first quarter of 1994, and when, on June 17, 1994, DirecTV and U.S. Satellite Broadcasting (USSB) sold their first system to Lemoyne Martin in Cowboy Maloney’s consumer electronics store in Jackson, MI, the U.S. DBS industry has created what remains today, according to the Consumer Electronics Association, “the fastest growing major consumer electronics product in history.”

According to the data on Chart 2, subscriber growth for year one measured 1.1 million (or 91,667/month and 3,114/day). Year two growth brought in an additional 1,918,000 subs, representing 74 percent more new subscribers than the prior year (or 159,833/month and 5,255/day). Year three garnered 2,030,000 subscribers, for a growth rate of 6 percent over year two (or 169,167/month and 5,562/day), and year four brought in 2,263,000, or a 12 percent increase over the prior year (or 188,584/month and 6,200/day). Finally, year five, which was the last full year of measured growth since the 1994 start-up, delivered another 2,637,000 net new subscribers, which was a 17 percent increase over year four (or 219,750/month and 7,225/day).

Why has DBS brought in so many subscribers and why is that so important right now? First, DBS has brought in so many subscribers because DBS, in most instances, provides superior service to its competition, is less expensive, and offers better quality than cable. As to why it’s so important for the two DBS system operators, Littleton, CO-based Echostar and El Segundo, CA-based DirecTV, to build their subscriber rolls today, the short answer comes down to one word: money.

By either moving a cable subscriber over to DBS, or by bringing in a subscriber to subscription TV for the first time via DBS, Echostar or DirecTV can begin delivering monthly revenue that presently averages approximately $54/subscriber. Multiply this number times 12 months and 12 million subscribers and one finishes with an annual revenue base of roughly $7 billion. In addition, more subscribers produce a better bargaining base to sell advertising slots to key national advertisers, and more subscribers are considerably more attractive to Wall Street and its investors. Additionally, more subscribers also make strategic, financial, and programming negotiations and investments in software and hardware that much easier for the respective system operators, i.e., it gives them considerable additional leverage to make good deals.

Years Six And Beyond: Goliath Revived

According to Chart 3, The Carmel Group estimates that by year-end 2005, U.S. DBS operators will be delivering services to approximately 30 million subscribers via high-power satellites to dishes measuring less than 39 inches in diameter. Indeed, the recent passage of pro-satellite federal legislation in Washington, DC, has done much to buoy these figures. Once and for all, this long-anticipated legislation should help to eliminate the misconception that in almost 50 million U.S. TVHHs, cable is the superior service for the delivery of local channels. That said, for the next few years, there is but a single major impediment in the cable versus satellite battle ahead: the cost of providing additional services to additional rooms within a given unit. Ironically, this “advantage to cable” scenario will also tilt toward a level playing field when, in the year 2000, the Federal Communications Commission has mandated that set-top boxes must be sold at retail by all cable (and satellite) providers.

Yet during this same timeframe (i.e., 2000-2005), cable will begin serving an estimated one fourth to one third of its estimated 66 million subscribers with new digital services.

Beyond that, it’s primarily a question of who can deliver the most services digitally, at the lowest cost per service.

Cable vs. Satellite: Digital Rules, Analog Dies

The message is clear: cable operators had better switch to digital or they will be swallowed whole by DBS. Assuming they do switch to digital services, the opportunity to rival (and possibly surpass) DBS services is marked.

Using an existing example (Cox’s Phoenix, AZ, top tier digital service), cable-based digital systems offer existing customers an installation cost of under $25 and a programming cost of $73.70/month or $884.40/year, in return for 157 channels (comprised of 117 video and 40 audio), including 26 premium movie channels. Conversely, DirecTV’s current tier-three digital service offers customers 151 channels (120 video and 31 music), including 32 premium movie channels, and an installation cost of $100 following purchase of a $149 hardware system. The cost of this DirecTV programming is $80.99/month or $971.88/year. Thus, in this instance, Cox Cable arguably offers a superior value, costing almost $90/year less than DirecTV. Plus, Cox does not charge for hardware, delivers only six fewer premium services, and offers six more system channels overall.

AIM Services: The Final Showdown

In the end, the race between satellite and its wired and other competitors will be won or lost on the battlefields of 1) services offered, and 2) at what value those services are offered relative to the competition.

Services offered in the AIM services category will include those from the sub-segments of personal TV (e.g., Echostar’s Dishplayer, Replay, or Tivo), AOL-TV, online banking, online trading, e-commerce, Internet banking, digital satellite radio, multimedia, paging, phone, data, and numerous other yet-to-be introduced services.

Subscriber numbers and revenues from just a handful of these AIM services promise to be hefty. An example would include e-commerce, where estimates suggest not less than $30 billion in revenues by year-end 2007.

If both cable and satellite operators are able to extract even a small sum monthly from each of the future content (and service) providers in these fields (be it from a monthly carriage fee, a transaction fee, an advertising fee, a subscription fee, or a combination of these fees), the bump in the revenue/sub/month should be enough to completely rearrange, (yet again), the TV and computer worlds as we know them today.

For cable, big-time challenges ahead involve a slow and costly growth process before digital will be deployed into tens of millions of U.S. TVHHs and businesses. Yet on the other hand, cable will deliver great bandwidth, which should be used for two-way services much sooner and more readily than will be available via satellite.

DBS, too, has its problems. Two-way services are tough to implement using a limited number of satellites and more limited bandwidth than cable. On the reverse side, DBS offers unrivaled ubiquity and mobility, which will become more and more important to the next generations of constantly connected U.S. citizens. In addition, DBS is substantially deployed as a digital product and now passes an estimated 560 million U.S. eyeballs. Plus, unlike the hundreds and hundreds of small- and medium-sized cable operators, U.S. DBS is run by only two savvy and sophisticated organizations that are clearly focused on the future of media, computers and telecommunications. This winnowing has resulted in less cost and likely more profits to themselves as players (because of reduced competition in the DBS space), and less customer confusion. On the reverse side of the coin, this scenario arguably leads to higher prices to consumers overall.

Ultimately, it all comes down to what works for the consumer, because in the end, these will be the beings that drive the “revenue per sub per month” vehicle down the 1,000- 2,000 channel superhighway of tomorrow. That said, be it satellite or cable-delivered, rest assured: things will work very well for the computer/telecom/media consumer of the 21st century.

Jimmy Schaeffler is a subscription TV analyst at The Carmel Group, a publisher and consultancy based in Carmel-by-the-Sea, CA. The consultancy specializes in satellite services, as well as general telecommunications, computers and the media. His e-mail address is: [email protected]. His phone number is 831/643-2222.