DirecTV Customer Count Soars as It Picks Up Cable’s Slack

The cable industry’s loss seems to be DirecTV’s gain.

The nation’s leading satellite television provider wowed Wall Street on Thursday, disclosing powerful growth in pay TV subscribers a week after three leading cable operators reported larger-than-expected customer losses for the second quarter.

DirecTV, which was acquired by News Corp. in December, added 455,000 net subscribers in the quarter, a 151% increase over the same period last year and far better than Wall Street’s consensus estimate of 285,000 additions.

A consumer rate hike by DirecTV this year also contributed to a 23% jump in U.S. revenue to $2.2 billion in the quarter ended June 30, and a 7% increase in the average bill, which is now $65 a month.

But retaining and acquiring subscribers exacted a toll on the company’s bottom line because of additional promotional and advertising expenses.

The El Segundo-based company swung to a net quarterly loss of $13.3 million, or 1 cent per share, down from a net profit of $21.6 million, or 2 cents per share, a year earlier.

Although Wall Street had expected that DirecTV would pick up some of the customers who had dropped cable, analysts were startled by the number -- especially at a time when college students are disconnecting their pay TV service for the summer. Jessica Reif Cohen, a media analyst at Merrill Lynch, titled her report on DirecTV’s second-quarter earnings: “Holy Cow! Now We Know Where All the U.S. Subscribers Have Gone.”

During a conference call with analysts Thursday, DirecTV’s new top executives suggested that they were just getting started. “We have the goods to build off of,” said Chief Executive Chase Carey, who took charge after the change of ownership.

DirecTV President Mitchell Stern said September could bring even better numbers because of DirecTV’s popular NFL Sunday Ticket package of professional football games, which will be available in high definition.

But some analysts were skeptical about DirecTV’s ability to maintain the kind of momentum the company demonstrated in the second quarter. Because of customer turnover, the company had to recruit almost a million new subscribers to post its net increase of 455,000.

“They have to run faster and faster to stay in place,” said Craig Moffett of Sanford C. Bernstein & Co.

Future increases will be even harder to come by because the overall pay TV market is nearly saturated, with more than 85% of the nation’s TV households subscribing to cable or satellite TV.

Believed by many to be a superior technology to cable when it was launched in 1995, satellite TV has captured about a quarter of the pay television market. With 13 million U.S. subscribers, DirecTV is second only to Comcast Corp., with 22 million basic cable customers.

Moffett said DirecTV’s traditional growth engines were nearly exhausted. The addition of local broadcast networks to satellite services has been crucial in luring consumers from cable. But by year-end, with about 97% of the country able to receive local broadcast channels through DirecTV or rival EchoStar Communications Corp.’s Dish Network, the satellite competitors will have to find new ways to attract subscribers.

Also, as early as next year, DirecTV could potentially lose the NFL Sunday Ticket to cable companies that have been clamoring for rights to the coveted sports package.

Many of DirecTV’s customers made the switch from cable because of the superior picture quality offered by the all-digital service. But cable rivals have begun to chip away. The cable industry has spent about $85 billion since 1996 to upgrade its networks to deliver such digital services as video on demand and high-speed Internet access.

Even so, consumers have been slow to embrace digital cable because of the added cost of the service, which requires a set-top box and lacks a unique drawing card. Moffett said DirecTV was benefiting from a perception among consumers that cable was inferior in value and quality, which he blamed in part on poor marketing.

“Cable’s idea of marketing is using unsold commercial time on their systems and marketing to their existing customers,” he said. “They simply aren’t doing enough retention marketing.”

Meanwhile, DirecTV said Thursday that its pending $3.5- billion sale of PanAmSat Corp. to an investment group led by Kohlberg, Kravis, Roberts & Co. was in jeopardy because of a malfunction in one of the firm’s 29 satellites. The problem would not affect future operations or revenue, according to DirecTV, but could allow the prospective buyers to back out of the deal, which was struck in April.

“They are evaluating the impact,” DirecTV Vice Chairman Eddy Hartenstein said Thursday. “We are working with them to help them address the effect of this event.”

DirecTV shares rose 42 cents Thursday to $16.75 on the New York Stock Exchange.

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Going for the dish

Cable TV operators lost basic subscribers in the second quarter while DirecTV added a record number of customers.

Gain or loss of subscribers Time Warner: -21,000 Cox: -54,000 DirecTV: +455,000 Comcast: -96,000

Source: Merrill Lynch