Steve Mehs
01-15-03, 04:00 AM
By Tom Watts
Last week in "Outside the Box," Doug Shapiro deftly answered the question, “Can Cable, DBS Coexist?” I agree with his conclusion that cable and DBS have set different courses to survive, thus avoiding all-out war. However, in the absence of war, I expect continuing battles and skirmishes rather than peace. These skirmishes may have major impact on the DBS industry, determining whether it ultimately peaks out in the low 20 millions of subscribers, a little above today’s levels, or expands substantially, reaching 35 million or more. We foresee DBS faring well in these battles, ultimately reaching the high end of this range.
KEY BATTLEGROUNDS
Cable has a number of weapons to use in its battles with satellite, including incremental services, exclusive programming and pricing. The incremental services provide the most interesting battlefront. While no incremental service is likely to enable cable to decisively capture DBS subscribers, each service has the potential to raise retention of existing cable subscribers, making it harder for DBS to grow.
Video-on-Demand. Video-on-demand (VOD) is one of the most powerful additional services, because of satellite’s difficulty in offering a directly competing product. To leverage this advantage, cable operators are rolling out VOD rapidly. The FCC cites Cox having VOD capability for 30 percent of homes passed and Comcast for nearly 50 percent of homes passed. Every cable operator is implementing VOD, often together with its ancillary service Subscription VOD (SVOD). As industry observers, we must follow the success of VOD closely. If it becomes a must-have service for viewers, growth of DBS could be slowed.
DBS is not left without ammunition. Both EchoStar’s and DirecTV’s aggressive promotion of personal video recorders (PVRs) should blunt the VOD attack. However, the functionality differs from VOD. We expect continued skirmishes as cable grow more adept in its VOD implementations.
Broadband. While cable’s VOD products remain in early stages, cable broadband has already gained powerful momentum. By year-end 2002, more than 50 million homes had access to cable modem services and subscribers totaled more than 11 million homes. This number will continue to climb rapidly.
To date, DBS operators have offered no viable response. DSL alliances have failed. First generation satellite broadband projects lack viable economic models. Second generation projects remain at least two years away. By the time DBS has a viable satellite broadband product, cable modems could capture 20 million subscribers, who would then be less likely to switch to DBS.
We expect 2003 to offer a number of intriguing developments on the broadband front. WildBlue should get back on track and offer a viable independent service that DirecTV and/or EchoStar could bundle with their video offerings. Alternatively, DirecTV or EchoStar could choose go-it-alone paths using Spaceway or EchoStar IX, although partnering looks much more attractive financially. Regardless of path, we expect the DBS operators to have a satellite broadband service with pricing and capability competitive with cable modem by 2006.
Voice Telephony. Residential telephony represents a rising force. As of June 2002, 2.1 million customers received their local telephone service from their cable operator. Satellites, with their quarter-second delay in each direction, have no response to this cable offering.
We do not expect voice telephony to be decisive in a choice of video providers. However, once a cable customer chooses phone service from his cable company, it represents more reason not to switch to DBS.
HDTV. The DBS players are making a major push in HDTV, being the first to offer HDTV nationwide. Both DirecTV and EchoStar have reinforced their commitment in the last week by integrating HDTV with their PVR strategies. We expect many cable operators to be slow in rolling out HDTV beyond the digital channels of their local broadcasters. This presents a sizable opportunity for DBS and could drive the next phase of growth.
DETENTE
Despite these battles, we do not expect cable and DBS to resort to their most powerful weapon – PRICE. Cable continues to use its incumbent status to impose regular price increases on the industry. Last year the cable industry raised rates an average of 6.3 percent. They have announced additional price increases this year.
Cable’s continued price inflation creates an attractive pricing umbrella for DBS to raise rates as well, while still offering a discount. EchoStar took advantage of this last week, raising its prices an average of 4 percent. Our pricing analyses show EchoStar typically prices about 29 to 35 percent under cable for comparable packages, while DirecTV prices 7 percent to 24 percent under cable. This price advantage should enable DBS to continue to grow. And, as Doug points out, cable is highly unlikely to respond with price competition.
Given the DBS price advantage and its expected ability to respond to service innovations, we project DBS can grow from its 19 million subs today to 35 million by 2011, increasing its market share from 21 percent to 30 percent. Cable can also expand, even while losing market share, from 69 million to 76 million subscribers, while also, of course, reaping the benefits of revenues from new services and higher prices.
Co-existence may not be peaceful, but it should be profitable.
Tom Watts works for SG Cowen Securities.
From SkyReport (http://www.skyreport.com/skyreport/jan2003/011503.shtm#four) (Used with Permission)
Last week in "Outside the Box," Doug Shapiro deftly answered the question, “Can Cable, DBS Coexist?” I agree with his conclusion that cable and DBS have set different courses to survive, thus avoiding all-out war. However, in the absence of war, I expect continuing battles and skirmishes rather than peace. These skirmishes may have major impact on the DBS industry, determining whether it ultimately peaks out in the low 20 millions of subscribers, a little above today’s levels, or expands substantially, reaching 35 million or more. We foresee DBS faring well in these battles, ultimately reaching the high end of this range.
KEY BATTLEGROUNDS
Cable has a number of weapons to use in its battles with satellite, including incremental services, exclusive programming and pricing. The incremental services provide the most interesting battlefront. While no incremental service is likely to enable cable to decisively capture DBS subscribers, each service has the potential to raise retention of existing cable subscribers, making it harder for DBS to grow.
Video-on-Demand. Video-on-demand (VOD) is one of the most powerful additional services, because of satellite’s difficulty in offering a directly competing product. To leverage this advantage, cable operators are rolling out VOD rapidly. The FCC cites Cox having VOD capability for 30 percent of homes passed and Comcast for nearly 50 percent of homes passed. Every cable operator is implementing VOD, often together with its ancillary service Subscription VOD (SVOD). As industry observers, we must follow the success of VOD closely. If it becomes a must-have service for viewers, growth of DBS could be slowed.
DBS is not left without ammunition. Both EchoStar’s and DirecTV’s aggressive promotion of personal video recorders (PVRs) should blunt the VOD attack. However, the functionality differs from VOD. We expect continued skirmishes as cable grow more adept in its VOD implementations.
Broadband. While cable’s VOD products remain in early stages, cable broadband has already gained powerful momentum. By year-end 2002, more than 50 million homes had access to cable modem services and subscribers totaled more than 11 million homes. This number will continue to climb rapidly.
To date, DBS operators have offered no viable response. DSL alliances have failed. First generation satellite broadband projects lack viable economic models. Second generation projects remain at least two years away. By the time DBS has a viable satellite broadband product, cable modems could capture 20 million subscribers, who would then be less likely to switch to DBS.
We expect 2003 to offer a number of intriguing developments on the broadband front. WildBlue should get back on track and offer a viable independent service that DirecTV and/or EchoStar could bundle with their video offerings. Alternatively, DirecTV or EchoStar could choose go-it-alone paths using Spaceway or EchoStar IX, although partnering looks much more attractive financially. Regardless of path, we expect the DBS operators to have a satellite broadband service with pricing and capability competitive with cable modem by 2006.
Voice Telephony. Residential telephony represents a rising force. As of June 2002, 2.1 million customers received their local telephone service from their cable operator. Satellites, with their quarter-second delay in each direction, have no response to this cable offering.
We do not expect voice telephony to be decisive in a choice of video providers. However, once a cable customer chooses phone service from his cable company, it represents more reason not to switch to DBS.
HDTV. The DBS players are making a major push in HDTV, being the first to offer HDTV nationwide. Both DirecTV and EchoStar have reinforced their commitment in the last week by integrating HDTV with their PVR strategies. We expect many cable operators to be slow in rolling out HDTV beyond the digital channels of their local broadcasters. This presents a sizable opportunity for DBS and could drive the next phase of growth.
DETENTE
Despite these battles, we do not expect cable and DBS to resort to their most powerful weapon – PRICE. Cable continues to use its incumbent status to impose regular price increases on the industry. Last year the cable industry raised rates an average of 6.3 percent. They have announced additional price increases this year.
Cable’s continued price inflation creates an attractive pricing umbrella for DBS to raise rates as well, while still offering a discount. EchoStar took advantage of this last week, raising its prices an average of 4 percent. Our pricing analyses show EchoStar typically prices about 29 to 35 percent under cable for comparable packages, while DirecTV prices 7 percent to 24 percent under cable. This price advantage should enable DBS to continue to grow. And, as Doug points out, cable is highly unlikely to respond with price competition.
Given the DBS price advantage and its expected ability to respond to service innovations, we project DBS can grow from its 19 million subs today to 35 million by 2011, increasing its market share from 21 percent to 30 percent. Cable can also expand, even while losing market share, from 69 million to 76 million subscribers, while also, of course, reaping the benefits of revenues from new services and higher prices.
Co-existence may not be peaceful, but it should be profitable.
Tom Watts works for SG Cowen Securities.
From SkyReport (http://www.skyreport.com/skyreport/jan2003/011503.shtm#four) (Used with Permission)