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Redirecting DirecTV

9/16/2005 8:00 PM Eastern

In the summer of 2004, LIN Television began shopping a new Spanish language service, WAPA America, and the company’s executives were bullish about the network’s prospects.

“We knew we had a very desirable service,” says LIN chairman, president and CEO Gary Chapman. “Puerto Ricans are the second-largest Hispanic group in the U.S., but there is no programming targeting them.”

But Chapman was surprised at how quickly DirecTV Inc. responded. “They had done their market research,” he says. “They knew that the Puerto Rican audience was very underserved by existing programming, and they were very aggressive about acquiring exclusive rights to the channel.”

DirecTV was so aggressive that Chapman didn’t even have to pitch the channel to the satellite provider’s arch rival, EchStar Communications Corp.’s Dish Network. Within weeks, DirecTV had acquired exclusive satellite rights to WAPA America, and by Sept. 1, 2004, WAPA America had joined DirecTV’s Hispanic lineup, Para Todos.

DirecTV at a Glance
Revenue (2004): $12.56 billion
Total Subscribers (Q2, 2005): 14.67 million
Para Todos subscribers (Q2, 2005): 850,000
Owners: Public, 34% owned by controlling shareholder News Corp.
Hispanic contacts: Mark Ryan, VP of marketing, Para Todos; Javier Prelooker, director, Para Todos.
Para Todos packages: Opción Especial (more than 80 channels, including 26 networks and feeds available in Spanish and seven Spanish-language music channels for $29.99 a month); Opción Ultra Especial (over 165 channels, including 30 Spanish networks and feeds and seven Spanish music services for $39.99) and Opción Premier (over 225 channels, with 30 premium channels, including HBO Latino, and a sports package of over 25 networks priced at $85.99 a month.)
Battle of the Tiers
Subscribers to Hispanic packages:
Operator Subscribers
Dish Network 1 million - 1.2 million
DirecTV Inc. 850,000
Comcast Corp. 250,000-300,000
Time Warner Cable Under 100,000
Cox Communications Inc. Under 100,000
Total Subscribers to Hispanic Tiers: 2.5 million to 2.7 million
Total Hispanic Cable Subscribers: 7.1 million
Total Hispanic TV Homes: 11.2 million
Note: DirecTV Inc. has publicly disclosed its Para Todos numbers, but other MSOs keep theirs a closely guarded secret. Comcast Corp. disclosed a figure of 250,000 at the National Show.
Sources: Estimates are based on Multichannel News interviews with a variety of industry executives.

WAPA’s story isn’t unique. Over the last 20 months, DirecTV has moved aggressively to court Hispanics, adding 11 new Spanish-language services and cutting the entry level price to from $38.99 to $29.99.

The list of Latino subscribers has also been growing at breakneck speed. “In January of 2004, when we began implementing the new [Hispanic] strategy, Para Todos had about 347,000 subscribers,” says Para Todos vice president of marketing Mark Ryan, who has been spearheading the effort. “Now we have 850,000.”

Those numbers are making DirecTV a major force in the Hispanic TV business, raising competitive concerns for cable operators and EchoStar’s Dish Latino offering, which remains the market leader with over 1 million subscribers to its Hispanic offering.

But DirecTV’s aggressive push to woo Latinos isn’t just a story about how the direct-broadcast satellite platform is doing a better job of targeting the country’s largest ethnic community. The success of its Hispanic strategy is also playing a key role in satellite’s overall growth.

Finding new ways to grow its business is important, because Wall Street has taken a guarded view of the DBS provider’s prospects. While DirecTV’s stock price has improved in recent months, it was still trading at around $16 in early September. That’s slightly lower than it was when it was spun off as a separate company in late 2003 with News Corp. as the controlling 34% shareholder.

Jimmy Schaeffler, senior multichannel research analyst at The Carmel Group, blames the sluggish stock on “one four-syllable word — competition.”

DirecTV has been hugely successful in siphoning off cable subscribers — adding nearly 4 million subscribers to the platform since the end of 2003. But the war for new subscribers has been expensive: the cost of luring customers has risen, and churn rates have increased for DirecTV.

“It is getting more expensive to acquire customers, because the pie for the general market isn’t really expanding,” says Michael Schwimmer, the newly named CEO of Sí TV. Most recently, he headed Dish’s programming department and launched the Dish Latino offering. “Cable and satellite, and pretty soon, the telcos, are all battling for the same subs.”

Given those competitive pressures, DirecTV’s top management has been quick to highlight its gains in the Hispanic market, where the population is growing rapidly and multichannel penetration is relatively low.

During the first-quarter conference call, DirecTV president and CEO Chase Carey cited the addition of 120,000 subscribers to the Para Todos package as one of the key factors driving their overall sub growth. “The sector has been a real achievement for us,” Carey said.

Having top management focused on the Hispanic market is an important change for DirecTV, says Richard Taub, a consultant who is currently helping 17 Latin American networks represented by the Condista media group gain distribution. “Dish beat out DirecTV and cable [in the late 1990s and early 2000s] because they made Hispanics a central part of their overall strategy. That is what DirecTV is doing now, and that is why they are seeing such strong subscriber growth.”

IN THE BEGINNING

DirecTV’s involvement in the Hispanic market is nothing new. The Para Todos package bowed regionally in 1999, and was rolled out nationally in 2000.

“At the time, DirecTV was heavily focused on being a provider of sports and movies,” Schwimmer says. “They had the largest [pay-per-view] package and all the big sports packages. Dish didn’t have that. So we differentiated ourselves, not just by having lower prices but by focusing on areas where DirecTV wasn’t active.”

One area was ethnic programming. By offering more channels at less cost, the Dish Latino offering launched in 1998 quickly became the leading Hispanic programming package in America.

That success prompted DirecTV management to rethink its strategy, and in March of 2003 Ryan volunteered to help. He had seen the importance of the Hispanic market first hand growing up in Los Angeles, which has the largest Latino population in the U.S., and during his travels to Latin America. In 1998, while working at University of Southern California, he had put together a deal for the first broadcast in Spanish of University of Southern California football games.

“I’m a fourth-generation Irish-American, but I really believed in the potential of the Hispanic market,” Ryan says. “So when I heard we were reevaluating the Hispanic strategy, I put my hand up and said I’d loved to be involved in [Para Todos].”

Management agreed, and Ryan spent the next nine months carrying out a wide variety of research that would form the basis of the platform’s new strategy.

ENTHUSIASTIC SUPPORT

While the effort predates News Corp.’s acquisition of DirecTV, the company’s new management enthusiastically supported the effort, “providing us with all the people and resources we needed,” Ryan says.

In January 2004, the DirecTV further strengthened its commitment to the area by hiring Argentina native Javier Prelooker as director of Para Todos. By February, the company launched its first addition, TyC Sports, a channel based in Argentina.

While the new strategy was based on months of research, its outlines were relatively simple. They would lower the entry-level price to $29.99. They would target bilingual, bicultural, relatively affluent Hispanic homes, and they would pay particular attention to parts of the community that were being ignored or underserved by their competitors.

“We knew that Dish was doing very well by focusing on Mexican content,” Prelooker says. “There wasn’t anything we could do about that. But if you’re an Argentine like me or a Colombian, you don’t want to always be watching Mexican programming. We said let’s go after the 1.8 million Colombians, the 1.5 million Ecuadorians, and all the other groups that aren’t being served.”

ADDING LATIN-AMERICAN NETS

Following that strategy, DirecTV has added 11 networks from Colombia, Puerto Rico, Peru, Ecuador, the Dominican Republic and other underserved markets, acquiring exclusive rights whenever possible.

Ryan expects that they will launch three to four more this fall to round out the package. “We will be adding Mexican content and covering up the rest of the markets that aren’t served,” he says. By the end of the year, “we will have programming from every Spanish-speaking country in the world except Cuba.”

Besides boosting sub counts by 145%, the wide array of programming is also “significantly lowering [Hispanic] churn,” Ryan says.

CUSTOM-MADE CHANNEL

All this activity has been good news for programmers. One distributor, Condista, has landed several of its channels on DirecTV and Castalia Communications has negotiated carriage agreements for five Alterna TV channels from SatMex.

Castalia has also worked with DirecTV and Cablecom, a MSO serving 66 communities in Mexico, to create Mexicanal, which launched at the end of August. The channel illustrates DirecTV’s very sophisticated use of research to approach to the market, says Castalia executive vice president Mark Henderson.

“Most of the Mexican programming in the U.S. comes from Mexico City, but only 5% of the Mexican population in the U.S. comes from that area,” Ryan says.

To tap into that market, DirecTV asked Castalia to “put together a channel with programming from the six or eight states where most of the Mexican population came from,” Henderson adds. “They really understood the demographics and the need for this kind of programming.”

The new content is also helping DirecTV establish closer ties to retailers in the Hispanic community, a factor that played a major role in Dish’s early success.

“Now that we have finally delivered a product that is best in its class at a good price point, we’ve seen a huge resurgence of the partnership with [retailers],” Ryan says.

Such alliances will be important as the competition for Hispanic subs heat up. DirecTV’s alliances with telcos like Verizon Communications Inc. and BellSouth Corp., which give subscribers the ability to bundle telephone and TV service, have played an important role in DirecTV’s subscriber growth — for the general market and Para Todos.

But those alliances could fray as Verizon and others begin offering their own video services, Schaeffler worries.

Cable operators are finally beginning to put together packages that can compete with satellite.

COMCAST FIGHTS BACK

Comcast Corp., for example, has been adding channels to its Cable Latino package and ramping up its Spanish-language video-on-demand product, says Mauro Panzera, Comcast senior director of multicultural marketing.

“We’ve eliminated the need to buy through digital tiers,” says Panzera. “And, because we’re local, we can customize our packages to the specific demos of the local Hispanic audience.”

Comcast currently has programming deals with over 50 Spanish-language networks that local systems can pick and choose from to appeal to local tastes. Many of its systems also offer 100 hours of free Spanish VOD, which can be used to target even more specific interests and cultures.

“Our orders keep doubling,” Panzera says. “It’s been a spectacular success.”

Panzera wouldn’t comment on specific numbers, but industry observers estimate that Comcast now has 250,000 to 300,000 subs to its Hispanic tier.

Other operators are hoping to emulate Comcast’s success. Charter Communications Inc., for example, launched its new Charter Latino package in three western markets this summer, including Los Angeles and Reno, Nev., says John Figueroa, director of sales and multicultural marketing for the Western Division of Charter.

The package, which costs $24.99 to $29.99 for up to 22 Spanish-language channels, is already boosting subscriber counts in some areas, Figueroa says. Since the offering’s June launch, subscribers to the Hispanic tier grew from 1.4% of the digital subs to about 4% in the areas around Riverside, Calif. “The beautiful part is that about half are new customers,” he says.

Cable’s push into the Hispanic market over the last year hasn’t slowed growth at DirecTV, which has added over 150,000 Hispanic subscribers to the Para Todos offering since the start of the second quarter.

Ryan also doubts that the emphasis on VOD will have much of an impact in the future.

“Cable is using VOD as a marketing tool because they don’t have the ability to offer as many channels as we do,” Ryan argues. “We have more channels and a very strong [digital-video-recorder] platform. I don’t see any evidence that VOD is going to be some kind of silver bullet.”

In fact, all the operators who have focused on Hispanic market and have revamped their packages seem to be seeing major growth, programmers note, with more to come.

“There is a huge untapped potential here for everyone,” says Gol TV chief financial officer Rodrigo Lombello.

Lombello declined to discuss sub counts for specific operators, but he believes that there are currently about 2.5 million subscribers to Hispanic tiers for cable and satellite. “A very low percentage of the multichannel universe are taking the Hispanic package,” he says. “We think that number could easily double.”

If so, DirecTV’s recent success with Para Todos won’t necessary come at the expense of other operators.

 

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