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Satellites Face Woes as They Tug at Cable

November 12, 1996|Sallie Hofmeister

When Tele-Communications Inc. raised cable television rates last summer by 21%, the customer protest was unprecedented: For the first time in its history, the nation's leading cable company lost subscribers--about 70,000 of them. The customer drain was a stark reminder of consumers' lack of loyalty to cable, particularly in the face of digital satellite services that offer a wider array of channels with better picture and sound quality at richer, but falling, prices.

In Denver alone, analysts estimate TCI's rate hike drove an estimated 1,500 customers into the arms of EchoStar Communications Corp., a satellite venture that directly challenged cable in July by slashing dish prices to bring customers' first-year investment closer in line with cable rates.

And in an unusual acknowledgment of satellite's threat, John Malone, the head of TCI, last month redirected the strategy of his cash-constrained company by scaling back cable upgrades that would allow new services such as telephone in favor of rolling out digital set-top boxes. Although the boxes will allow TCI to offer more channel choices, analysts say the company still needs to upgrade its systems to match satellite's picture and sound quality.

That could take years, giving satellite a long window to continue its march on cable. Dismissed as vaporware a decade ago, digital satellite could be installed in as many as 20% of the nation's households by 2000, according to some analysts. That is up from about 4% today and only 1% at the end of last year. In contrast, more than 65% of the nation's households subscribe to cable.

Still, the long-term prospects of satellite TV are far from clear, with many investors viewing dish prices as only one impediment to widespread use.

Satellite services, so far, cannot offer local broadcast channels and have limited two-way communications, impeding the potential for Internet applications.

"Digital satellite is not a mass market product, and in nonrural areas, tends to be a rich man's toy," said John Tinker, an analyst at Montgomery Securities.

Tinker, among others, believes that cable will staunch losses to satellite once it upgrades its systems to offer its own digital TV service as well as high-speed connections to the Internet through modems. The big question is how soon the cable industry can deliver on promises long unkept.

In the meantime, satellite TV services could narrow the cost advantage of cable. In the last four months, dish prices have dropped to $200 from $600, helping establish the pizza-sized TV receiver as one of the most successful consumer electronics products ever, according to DirecTV, the market leader, with 2 million subscribers.

Eddy Hartenstein, the president of DirecTV, says the price cuts have broadened its appeal, with the average household income of its subscriber at about $40,000, down from $50,000. DirecTV, a GM Hughes Electronics subsidiary, pioneered the technology and launched its service in mid-1994.

The services are still considered expensive, requiring initial outlays of $500 or more. To qualify for discounts on its dishes, DirecTV and EchoStar require customers to prepay for a year's programming.

Carmel Group, a Carmel-based market research firm, predicts that suppliers will be giving away the hardware within the next two years to drive up subscriptions.

Price wars could threaten the survival of some weaker competitors even before News Corp. enters the business late next year, bringing expected deeper price cuts to overcome its late entry.

Analysts estimate that DirecTV and EchoStar are each spending more than $200 per subscriber to subsidize the cost of delivering the service.

If EchoStar continues signing on new customers at its current rate, sources predict it could run short of money next year, when it must make payment on a big bond issue. The company, which has 250,000 subscribers--about 1.25 million shy of the number required to break even--says it is looking for a strategic partner to raise what analysts estimate to be $500 million needed for planned expansion.

While EchoStar has held talks with several phone companies, including Bell Canada, the company thought to be the most likely partner, Sprint, is cooling to the idea, of a minority stake, according to industry sources.

The industry price wars have soured investors on United States Satellite Broadcasting, which offers a limited package of channels and lacks the satellite capacity to expand. Its stock plunged from $38 a share in July to the mid-teens today, fueling speculation of an eventual buyout by DirecTV.

To help defray start-up costs, DirecTV sold space on its first satellite to U.S.S.B. and struck a deal under which U.S.S.B. would deliver 25 complementary channels, including MTV and HBO. About 45% of DirecTV customers subscribe to U.S.S.B., meaning DirecTV could gain cost efficiencies by combining billing and other back-office operations in a merger.

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