DBS Turns a Corner

Cable World, July 15, 2002

Byline: ANDREA FIGLER

John Ponzio strong-armed his housemate Wayne Sable into dropping cable and using a satellite dish last month. After all, 28-year-old Ponzio was locked into a one-year leasing contract with direct-broadcast-satellite provider EchoStar Communications, and breaking it would have meant paying a hefty fee.

Since the pricing and programming for both packages were about the same, Ponzio's commitment to EchoStar won over. Sable dropped his subscription to cable operator Adelphia Communications the very next day.

This simple exchange between housemates illuminates this year's larger trend of satellite subscribers sticking with the dish despite intense dish buyback programs by cable companies. It shows that EchoStar and its main competitor, DirecTV, are benefiting from a strategic move to let subscribers rent or lease equipment rather than buy it upfront - the same tactic that's worked so well with cable.

In fact, this move has helped DBS providers reverse last year's upward climb in churn, which has leveled off at about 1.5% a month for the satellite industry, according to three satellite analysts.

EchoStar's monthly churn fell to 1.4% in the first quarter of this year, equivalent to the same quarter a year ago but below the 1.7% churn rate for the second and third quarters last year, according to John Stone, a satellite analyst with Ladenburg Thalmann. DirecTV, he says, reported a drop in churn to 1.6% in the first quarter, below the 1.8% rate for the same period last year and a 2% peak in the second quarter of 2001. "The industry is changing," Stone says. "They are starting to go to one-year commitments."

The move to reduce churn is key, says Stone. "Churn is the enemy to subscriber valuations."

There is a dark side to this satellite-leasing tactic, though. The commitments end within a year, threatening the current slowdown in DBS churn. For instance, EchoStar's "I Like 9" promotion, which lured many new subscribers last year with a $9-a-month package and a yearlong commitment, will start to expire in the second half of this year. The end of the promotion could put subscribers back into the hands of cable operators, says Yankee Group Michael Goodman.

Then, the basic reasons subscribers drop satellite will become more obvious. Todd Wiener, president of Innovista Research Inc., found that about 7% of the 1,600 cable consumers polled dropped their satellite subscriptions last year. Of those who abandoned satellite, 29% dropped satellite because they were not satisfied with the product; 27% felt the satellite packages cost too much; 20% didn't spend enough time watching the shows; and 14% moved.

Other reasons that subscribers leave satellite these days are satellite's lack of local channels, poor picture reception due to weather, and high equipment costs, according to a cursory poll by Cable World.

But, for most subscribers, it boils down to price. Joe Moceri, a financial adviser for a major Wall Street firm, left digital cable for satellite because it costs less. EchoStar offered free installation of a dish and four receivers if Moceri, or any subscriber for that matter, agreed to a one-year commitment. While the four receivers would bring digital television to all rooms in his house at no extra cost, digital cable, provided by Comcast Corp., would have cost an extra $14.85 a month.

When this one-year satellite contract ends, however, Moceri has no qualms about switching back to digital cable. He would even sign a one-year contract with cable if the price were right. "If I could go to all digital cable at a lower price, I would do it."