Law to Fulfill Satellite TV’s Holiday Wish

Satellite television is about to get a huge boost from the federal government that should translate into lower prices, more choice and better service in pay TV services for consumers.

New rules approved by Congress last week and expected to be signed into law Monday by President Clinton allow satellite companies to sell local broadcast channels to all their customers for the first time ever.

The change will allow El Segundo-based DirecTV and its smaller rival, Dish Network, to compete head-to-head against the cable industry. Satellite service companies already are offering the lowest prices in their history and are preparing promotions and specials to celebrate their new competitive freedoms.

Already under attack from satellite services peddling crisper pictures and more channels, cable operators have been busy upgrading their networks to roll out new services such as digital and interactive TV with expanded channels, high-speed Internet surfing and telephone.

After months of delays and haggling in Washington, the legislative change is coming just in time for the holiday shopping season, when satellite services typically sign up record numbers of new customers. Consumer electronics retailers already are talking up the added advantages of satellite and preparing for record holiday sales of dishes and receivers.

“Lots of people have held off buying satellite because they can’t get the local channels, but now people will be standing in line,” said Tom Campbell, a director of Ken Crane’s Home Entertainment, which has eight stores in Los Angeles and Orange counties. “We’ve ordered as many dishes as we can get our hands on and still may run out. Our business will quadruple this Christmas.”

Meanwhile, stock of DirecTV’s parent, Hughes Electronics Corp., a subsidiary of General Motors, is shooting upward. Shares have soared 65% over the last three months, closing Tuesday at $80 a share, down $1 on the New York Stock Exchange. Some analysts expect shares to hit $100 over the next 12 months as DirecTV, which accounts for more than 80% of Hughes’ stock market value, adds new subscribers at cable’s expense and rolls out services such as Web surfing, shopping and e-mailing over TV.

A spinoff of DirecTV in the next six months, speculated upon on Wall Street and debated by the GM board, could also propel the stock, which under-performs EchoStar Communications Corp., the owner of Dish Network, because of uncertainties in Hughes’ satellite manufacturing operation.

The nation’s two satellite TV services, DirecTV, the leader with 7.8 million subscribers, and Dish, with 3.1 million customers, plan to make local broadcast signals available to every customer in Los Angeles and New York immediately after the president signs the measure, adding an additional 23 cities or so to their roster by early next year.

The companies will sell a package of five local channels--ABC, NBC, CBS, Fox and PBS--for between $5 and $6 a month, adding the WB, UPN and others as they increase their capacity with the launch of new satellites. Under the bill, the companies have until 2002 to carry all local channels in markets where they carry any.

EchoStar is already offering local channels to some customers in 13 cities, including Los Angeles, although in some cases, existing customers need special equipment to receive them. DirecTV’s existing customers in the top 20 cities will need no additional equipment, thanks to advances in compression technology that will allow the company to send more channels from its main satellite.

Lack of Local Channels Has Hindered Business

Currently, most satellite customers must use an antenna or buy a basic cable package to receive their local signals. Studies show that the lack of local channels on satellite is the biggest factor keeping consumers from buying a dish, leading analysts to predict mass defections from cable as a result of the new law.

Though the cable industry has diligently improved its record because of the threat of satellite, many consumers are eager to retaliate against years of monopoly practices and perceived rip-offs. Over the next five years, analysts expect cable operators to lose more than 10 million of their more than 70 million customers today, as satellite’s beachhead doubles to nearly a quarter of the nation’s 100 million households.

“We anticipate record growth again next year,” said Eddy Hartenstein, president of DirecTV. “The introduction of new services gives us a continuing advantage over cable.”

Many of the 2.5 million satellite customers who subscribe to cable are expected to cut their cable connections, saving $10 or more per month by buying the local channels from their satellite operator instead. While some cable companies sell a package of broadcast network signals for $10 a month, others charge a minimum of $30 because they package them with other channels.

Many analysts expected to see DirecTV, already the nation’s third-largest pay TV service, catapulted into the top ranks with Time Warner and AT&T.;

AT&T; could be particularly vulnerable to defection because of the high number of satellite customers who analysts believe are among its cable customers and the lingering service problems of systems bought in March from Tele-Communications Inc.

DirecTV, which pioneered satellite TV service in 1994, could benefit more from the deregulation than Englewood, Colo.-based EchoStar.

While Dish Network is sold mostly through a toll-free telephone number, at Sears and Target, DirecTV is available at the nation’s leading consumer electronics retailers, including Radio Shack, Circuit City and Best Buy. Retailers receive commissions of up to 5% on the sale of DirecTV service--a healthy incentive that made satellite the most successful consumer electronics launch in history.

With more than twice the subscribers of EchoStar, DirecTV may also be able to negotiate better terms for carrying the local channels with broadcasters. The advertising clout of GM also helps with broadcasters.

Under the bill, satellite carriers can carry local channels immediately, but must negotiate so-called “retransmission consent” covering these rights within six months.

Broadcasters had sued both EchoStar and DirecTV, claiming that they illegally sold packages of network signals. Under current law, satellite carriers can sell these packages only to customers who cannot pick up the signals using an antenna.

EchoStar is still fighting the suit. But DirecTV settled the suit by cutting off network signals to a few hundred thousand customers this summer.

Satellite costs have fallen from more than $1,000 upfront four years ago to as little as $100 today--and in some cases less. Retailers are preparing special installation promotions, and EchoStar is offering rebates that bring upfront costs to nearly nothing. Ken Crane’s Campbell said his store also is offering two months of free programming to new DirecTV customers, including local and national channels.

“Satellite companies have been willing to subsidize the cost of equipment and programming to get subscribers,” said Thomas Eagan, an analyst at PaineWebber Inc., who calculated that a package of 40 channels costs customers about the same on cable as on satellite. But he said a total of about 105 channels, including nine premium channels, costs cable customers an average $86.45 a month, double what satellite subscribers pay for the same package.

The subsidies have delayed DirecTV’s financial break-even targets by several years, though Hughes is already breaking even by cash flow measures. Analysts applaud the strategy of exploiting cable’s vulnerability even if it means sacrificing early term profitability.

“Better to make hay while the sun shines, signing up customers while cable is still getting its act together,” said Vijay Jayant, an analyst at Bear Stearns.

Sources say GM is considering a spinoff of DirecTV within the next six months and is cleaning up the corporate structure of the business to make it more attractive as a free-standing stock.

The timing couldn’t be better. In addition to the new legislation, DirecTV could also get a lift when it introduces AOL Plus and AOL TV in the first half of next year with partner America Online. The new offerings help it match the high-speed Internet access and TV Web surfing services offered by cable.

The competition is having an impact on cable companies. In pockets of the country with more than one cable service vying for the same customers, rates have generally not risen much or fallen, indicating that cable operators may start discounting in the face of new competition.

However, with cable operators eager to help offset the investments in new services, some analysts predict they will more likely give customers breaks on bundled services: offering free HBO to cable subscribers who buy high-speed Internet access, for example.

While satellite services use slower telephone wires as a return path for Internet connections, Hughes is working on new technology, called SpaceWay, to overcome the drawback. The company has also signed partnerships with several regional phone companies enabling it to offer customers a bundle of services that include phone. And it has invested in several new ventures, from satellite radio to personal TV recording devices, that could help broaden its offerings even more and prepare for the coming free-for-all in the pay TV arena.