ECHOSTAR-DIRECTV MERGER MAY CHANGE DISTRIBUTION
Proposed sale of Hughes Electronics, owner of DirecTV, to EchoStar for $26 billion may augur change in retail distribution. DirecTV, which has 10.3 million subscribers, had dominated retail sales largely because of incentive package it offered dealers who agreed to sell service exclusively. Dealers that also sold EchoStar received less support from DirecTV in terms of funding for promotions. EchoStar, whose largest retailer was Sears, also sold Digital Sky Highway (DISH) service through independent chains including P.C. Richard in N.Y.C. and Sight ‘n Sound in Oklahoma City. It, along with Sears, sued DirecTV in 2000, alleging violations of antitrust law, and both cases are pending. EchoStar has 6.4 million subscribers.
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Other distribution question will be DirecTV’s agreement with Blockbuster to sell service through video rental chain’s stores, venture that got off to fast start in 2000 but has slowed since. Blockbuster also has worked with DirecTV on marketing and selling its pay-per-view service. “I have a dream now that I can start selling DISH without suffering the consequences of being dual- branded,” said R.C. Willey Vp Steve Child. “The biggest impact will be to see what happens to distribution and see if DirecTV changes some of the policies that led to the current strategy.”
DirecTV and EchoStar officials said proposed deal wasn’t likely to be finalized for at least year. Shareholder vote isn’t expected for 4-6 months and govt. regulatory approvals could take 9 months or more. It also probably would take 3-4 years and $2.5 billion to change satellite receivers and completely integrate subscribers to both services, they said. Goal is to have single set-top box capable of receiving both services, EchoStar CEO Charles Ergen said. EchoStar will be company’s new corporate name, while DirecTV serves as retail brand.
Combination also is expected to drive down per-subscriber acquisition costs, which ballooned recently at DirecTV to more than $500. Combined companies would reduce per-subscriber subsidies by $100 and marketing and advertising expenses by $10, Ergen said. Merger of STBs would lower costs another $30, he said. Per-subscriber revenue from advertising and interactive services also was forecast to rise to $30 by 2005 and up to 60 new markets could be added for local channel service, Ergen said. EchoStar and DirecTV serve 35 and 41 local markets, respectively.
“What’s going to happen in the next 12 months I don’t know, but you know in the long term they're not going to do anything to affect that short-term business because they can’t afford to do that,” said Cowboy Maloney’s Electric City Mdsg. Vp Eddie Maloney, whose Jackson, Miss., chain was among first to sell DirecTV service in 1994. “I don’t think anyone could have been successful selling both services because you had to land on one of them. There is going to be a lot of confusion that will be cleared up in the next year.”
Much of the confusion may stem from combining of companies’ technologies. On hardware side, Thomson and Sony have been major manufacturers of standalone DirecTV receivers, while Thomson, Toshiba and Mitsubishi have marketed combo DirecTV receiver/high- definition decoder. EchoStar has largely sold DISH receiver under own brand, although JVC has carried models in past. EchoStar has built some receivers itself, but also relied on contract manufacturers SCI Systems and Vtech in past.
“We're not worried because Thomson already is the leader in supplying digital set-top receivers and systems,” Thomson spokesman said. “We have built a very strong market position because of our technological achievements in co-developing the DirecTV system, because of our efficient cost position as a high- volume manufacturer and of course because of the RCA name.” Sony spokesman declined comment.
Also still to be resolved will be conflicts in various technology platforms. While EchoStar developed personal video recorder/satellite receiver that uses OpenTV’s interactive middleware, DirecTV has signed agreements on combo with TiVo and Microsoft’s UltimateTV. Given recent breach of contract suit EchoStar filed against Microsoft’s WebTV, industry observers questioned its willingness continue working with software giant. Satellite services also use rival encryption software. EchoStar relies on Nagra and DirecTV uses NDS.
On broadband front, Hughes Network Systems (HNS) has championed DirecPC high-speed Internet access and recently rolled out 2-way service. Meanwhile, EchoStar has invested $100 million in Starband, similar service that’s partly owned by Gilat Satellite Networks and has had limited success. “I don’t know how you can recommend somebody buy something from a company that may not be in business a year from now, but we'll see what happens,” said BrandsMart Pres. Michael Pearlman, whose chain once sold EchoStar before switching to DirecTV.
Also to be decided will be combined companies’ relationship with NRTC and Pegasus Communications, which have right to sell DirecTV service in rural markets. Pegasus (1.5 million) and NRTC (300,000) have combined 1.8 million subscribers. Noting Pegasus’ contract with DirecTV, spokeswoman said company remained “committed” to satellite business. “It’s been a long 18 months and it will be good to get the focus of the business back on selling the satellite service,” spokeswoman said, referring to length of time General Motors has sought to sell Hughes.