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What’s A DBS Company To Do?

Seeking A Three-Way Bundle That They Control

By The Carmel Group’s Jimmy Schaeffler

Last week, The Carmel Group spent a good deal of time learning about a company that is rumored to be a candidate to work with DirecTV and/or EchoStar, as both satellite TV companies try to build their joint or separate telecommunications bundles. These would be bundles of three key services: video, voice and Internet. What DirecTV and EchoStar need are terrestrial voice and 2-way Internet broadband services that they each (or together) can manage, control and from which they can reap the key rewards.

Right now, both EchoStar and DirecTV have great video infrastructure, which each has painstakingly built and nurtured during the past 15 or so years. But, because of the limitation of a space-based geostationary satellite infrastructure, neither has either a voice service or a 2-way Internet broadband service that they control and make significant money from.

 

Thus, unlike the satellite-based video services DirecTV and EchoStar each controls within their respective telco-dominated bundles, the telcos instead control the terrestrial 2-way Internet broadband and the terrestrial telephone parts in today’s bundles. In the case of EchoStar, it plays with AT&T and lends its part, which is a satellite dish on as many AT&T homes as possible. DISH splits the video revenue with AT&T, and AT&T takes most if not all of the 2-way Internet and voice revenues. The same thing holds for DirecTV and its deals with Bell South and Verizon.

Where it stings the most for DirecTV and EchoStar is in the competitive zone. Years ago, DirecTV and EchoStar had the clear advantage. This is how, since June 1994, they have garnered the more than 25 mil. subscribers they collectively own. They both offered digital video and nascent Digital Video Recorder (DVR) and HDTV services that were superior, on a nationwide level, to what cable offered.

But cable saw a longer-term advantage, and built out its terrestrial infrastructure, with bigger pipes into the home. With much if not most of that infrastructure in place today, cable companies are the only ones that can offer a true bundle, on a mass scale, nearly nationally, where cable controls and it reaps the benefits of each part, i.e., telephony, 2-way Internet broadband and video service. The telephone companies are talking about going there, with both Verizon and AT&T spending, they say, billions of dollars to get to the same bundle. But, they both are still years away from changing the competitive landscape on a national scale.

Thus, although the joint venture combination of EchoStar and DirecTV apparently backed away from the AWS auction that has been running in the U.S. since August 9, both EchoStar and DirecTV still seek the Holy Grail: A Three-Way Bundle That They Control.

As such, both DirecTV and EchoStar will be looking to combine with one another, to some extent, but both have huge problems doing that. More importantly, both will be looking at new technologies and potential partners that can get them closer toward A Three-Way Bundle That They Control. That is their true future.  

In that mode, there will be lots of new spectrum developments, lots of new decisions emanating from the Federal Communications Commission (FCC) and Congress, and lots of new companies that will try to position themselves into this quest. Yet, at the end of the day, it is going to be very challenging for both EchoStar and DirecTV, both alone and together, to timely fashion a solution to their bundle blues. That is because of a couple of key dynamics. First, there isn’t all that much spectrum out there that is available and that will promptly change the picture. In a related sense, there also aren’t that many technological answers. Moreover, the handful of companies that have looked that far ahead and are challenging these new voice and Internet frontiers, so to speak, are building their own fiefdoms, and not necessarily looking to be bought or allied with a hungry DBS company or companies.

That said, even if DirecTV and/or EchoStar find that elusive spectrum, technology and company that will take them to A Three-Way Bundle That They Control, getting the services out there and marketed under a DirecTV and or EchoStar brand is going to take many more years. Moreover, in the race they are in, neither DirecTV nor EchoStar, alone or together, has what was once a given. Neither has years and years to put the competitive strategies and tactics in place against cable and the telcos. In fact, each year lost from here forward is going to mean less growth and fewer billions of dollars coming from fewer millions of subscribers, themselves all looking for the Three-Way Bundle That They Control.

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