News

DirecTV Cleans Up Ahead of Merger

5/26/2002 8:00 PM Eastern

As it moves forward with its planned merger with EchoStar Communications Corp., DirecTV Inc. has made headway in reducing churn and keeping subscriber-acquisition costs in check, chairman and CEO Eddy Hartenstein said last week.

At last week's Lehman Bros. Global Wireless Conference here, Hartenstein said customer churn over the past three quarters has averaged about 1.8 percent per month, significantly lower than the average of 2.5 percent per month for cable operators.

DirecTV also expects to beat its first-quarter monthly churn rate of 1.6 percent, which marked a 20 percent improvement over last year, he said.

Churn reduction was fueled by simplified programming packages and pricing plans, including a recently announced initiative to install two satellite dishes in customer homes for $99.99, and by cracking down on piracy.

"Since changing the course of the DirecTV business in the middle of last year, in its purest form, we've essentially pursued a two-pronged strategy of continuing to grow our customer base but doing so with a much sharper emphasis on financial returns," Hartenstein said. "Demand for DirecTV service has never been stronger.

"In each of the last three quarters, beginning with the third quarter of last year, we have achieved record gross additions for DirecTV owned-and-operated subscribers."

LOCALS HELP

The ability to offer local broadcast-TV stations also went a long way toward boosting subscriber numbers. To date, DirecTV offers such stations in 43 major U.S. markets. It expects to expand that footprint to 51 markets by the end of the year, with the launch of the DirecTV 5 satellite.

Local channels also help reduce churn, Hartenstein added. In markets where over-the-air stations are offered, the churn rate is 25 percent lower than in markets where they aren't.

Hartenstein said subscriber-acquisition costs have been trimmed from $575 per subscriber to about $525 this year, and continue to decline.

DirecTV has been able to cut those costs by eliminating subsidies to manufacturers, offering more attractive programming packages, tightly screening out credit risks and aggressively going after pirates through a new certificate program that reduces the number of set-top boxes that are purchased but never activated, Hartenstein said.

As an example of that crackdown, Hartenstein noted Wal-Mart Stores Inc.'s new policy of no longer stocking DirecTV units at its retail locations.

Instead, customers sign up for service at Wal-Mart and receive a certificate. Those customers must then call DirecTV to activate service and schedule an installation by the company's own Home Services Network.

DirecTV also is swapping out old activation cards for new conditional access cards, which should also reduce signal piracy. And DirecTV is aggressively pursuing pirates through legal channels.

"Last year we shut down 170 illegal Web sites, sued 159 civil defendants and were awarded $20 million in judgements," Hartenstein said. "It's also important to note that even with today's lower SAC, we're able to provide more benefits to the consumer.

"An example of this is how we now offer consumers a free installation year-round, whereas in the past, even with a higher SAC, we were only able to offer this promotion occasionally. Clearly, DirecTV is getting more bang for the buck from its investment in acquiring customers."

VALUATION GAP

DirecTV also is paring down programming costs — currently at about 40 percent of revenue — and expects those costs will come down even further after the EchoStar merger, when it will have a larger subscriber base.

But despite DirecTV's performance, Hartenstein lamented the company's lower per-subscriber valuations relative to cable — about $1,500 per subscriber, compared to $3,250 per subscriber for cable.

"This valuation gap is one in which we are extremely focused on and, as a management team, determined to close," Hartenstein said.

Despite some analysts' feelings to the contrary, Hughes CEO Jack Shaw said the planned merger with EchoStar is on track and should be completed by the expected date.

EchoStar first announced its planned $28 billion merger with Hughes, DirecTV's parent, in October. Since then, regulatory roadblocks and questions regarding the combined company's impact on the rural market have led several analysts to believe that there is a high probability the merger will not be approved.

Shaw took exception to that speculation, claiming the approval process was moving ahead as planned and that regulatory approvals should be forthcoming in September or October.

"We remain very confident that we'll receive the necessary regulatory approvals to complete the transaction," Shaw said.

September