The State of U.S. DBS + MDUs (Circa 3d Q 2005)

By: Jimmy Schaeffler

The State of U.S. DBS + MDUs (Circa 3d Q 2005)

Multiple Dwelling Units (MDUs) have always been a logical audience for every provider of multichannel pay TV. In fact, the traditional cable industry and its wired brethren have long appreciated the value of, and the revenues from the 50 mil.-60 mil. U.S. MDU inhabitants.

Yet, for the two key U.S. Direct Broadcast Satellite (DBS) providers, EchoStar and DirecTV, as well as the relative newcomer, Globecast, those residing in apartments, condominiums, hotels and dormitories remain an elusive target.

The Key Challenges

One of the key reasons why DBS operators have had difficulty delivering their services to those in America’s MDUs is because DBS margins tend to be rather slim, and typically in the MDU world, there are more players looking for a part of the pie than there are in the single family unit (SFU) side of the DBS business. Thus, it becomes harder for DBS providers to make the profits necessary for the investments in MDU subscribers. By comparison, when a DirecTV or an EchoStar spends $600+ in Subscriber Acquisition Costs (SAC) to garner a SFU subscriber, the majority of the typical Average Revenue Per Unit (ARPU) of $60+/month goes to either EchoStar or DirecTV (and nobody else). In the MDU world, DirecTV and EchoStar must traditionally share ARPU with the building owner and/or the building manager, meaning it takes sometimes twice or more as long to recoup their SAC investment. Thus, SFU business models just can’t be applied to MDU scenarios.

Furthermore, churn, or subscriber turn-off, is typically higher in MDUs, because they are typically comprised of people who tend to be, on average, more transient, and that have lower relative incomes than those in SFUs. If churn is high, then the DirecTVs and EchoStars of the world tend to be much more reticent when considering the up-front SAC required to obtain any new subscriber. Why would a DBS operator spend $600+ to obtain a new subscriber, and then have to wait three or four years before breaking even, only to have the subscriber churn out after two and a half years (about half the normal subscriber lifetime for EchoStar and DirecTV subscribers)? 

In addition, new DBS providers must cope with entrenched cable and Private Cable Operators (PCOs), many of which have exclusive, perpetual contracts in place, which are sometimes difficult to oppose. Additionally, MDU owners usually are not receptive to tenants placing satellite dishes on balconies or other spots outside their units, which means owners tell tenants they cannot mount dishes and tenants often believe them.

Other challenges involve technical considerations tied to on premises wiring, set-top boxes, and the distribution of signals into MDU environments. 

Plus, in most higher-end MDU properties, at least, expect the telephone providers, both large and small, to begin targeting MDU subscribers for newly developed bundles of 1) audio-video, 2) telephony, 3) two-way Internet broadband, and 4) wireless services. Electric utility companies are also eyeing the telecom space to see if they can deliver signals and increase their profit margins. If done properly, these new bundles from the likes of cable and telephony wired operators will make continued movement towards MDUs particularly challenging for the DirecTVs, EchoStars and Globecasts of America’s DBS stage. 

The Current State of U.S. DBS

DirecTV today states its subscription base rests at 14.7 mil. as of the close of the second quarter 2005. As noted on the accompanying charts, The Carmel Group estimates DirecTV added another 380,000 net new subscribers during 3d Q 2005, meaning the system today claims slightly over 15 mil. total subscribers. This accounts for an estimated U.S. DBS market share of slightly over 56% for DirecTV.
EchoStar’s market share today is estimated at nearly 44%, which represents an estimated 11.5 mil. subscribers as of the end of 3d Q ’05. As of close of 2d Q 2005, Echostar’s firm base stood at 11.8 mil. total subscribers, having added an estimated 225,00 net news subs during April, May and June of this year.

Globecast would have been added to the accompanying charts, however, the French-owned, New York City-based DBS provider does not make public the above-described subscriber data. Thus, for the time being, the charts describing the U.S. DBS landscape will remain limited to the key duopolists, EchoStar and DirecTV.

The chart entitled “3-Year Quarterly Net New DBS Sub Growth” takes the reader back to late 2002, when DirecTV and EchoStar together added almost 700,000 net new subscribers to close the holiday season. By the end of last year, this 4Q total had risen another 200,000 subscribers, which equaled a total gain of almost 30% in a 24-month timeframe. This points out that the influence of Rupert Murdoch has been particularly impressive because, since taking over DirecTV in early 2004, the News Corp head has infused hundreds of thousands of additional subscribers into the U.S. DBS industry. What is particularly interesting is to see Murdoch grow the business at a time when most pundits in the U.S. telecom business were saying the subscriber base for companies had actually cooled. And what then becomes particularly provocative for a column like this is the question: Can Murdoch—or Charlie Ergen at DirecTV or David Sprechman at Globecast—do the same for DBS growth into U.S. MDUs?

DirecTV’s Direction

Despite facing almost all of the obstacles above, DirecTV is forging ahead in today’s MDU space with headlines such as these: “For Rent: Stunning 3BR 2Bath, w/Oak Parquet Floor, Walk-In Closets, Amazing Views of Up To 225 Channels of DirecTV Programming in Every Room.” This headline accompanied DirecTV’s August 2, 2005 announcement of a new alliance with New Jersey-based MDU Communications, to deliver DirecTV programming to a new, Lower Manhattan, New York City high-end apartment building featuring 274 units. DirecTV and its new partner tout 225 channels of programming that can be accessed by subscribers from “…each of DirecTV’s [8] satellites via a single wire to the MDU customer’s home.”

Notes DirecTV VP, Daren Benzi, “Our new one-wire technology uses the building’s existing wiring, plus we can support older DirecTV receivers, and also install multiple receivers off of one dish. Ours is a plug and play unit set in one communications closet, which then serves several scores of units in an MDU.” Benzi suggests that one of the better future opportunities for DirecTV’s MDU division will be to deliver the DirecTV brand, on an exclusive basis, to newly constructed MDUs. Adds MDU Communications’ CEO, Sheldon Nelson, “We have three contracts available to building owners, based upon our investment in this new technology. One is tied to a bulk package, one to an exclusive agreement, and a third to a very competitive model.”

EchoStar’s Energy

EchoStar’s VP, Commercial Services, Brian Neylon, highlights his company’s MDU distribution method, which is to deliver the product and service both directly (via contacts from MDU consumers), and indirectly (via relationships with middlemen retailers or Private Cable Operators (PCOs)). This tracks the strategy EchoStar has instituted in the enterprise side of its business. Notes Neylon, “Historically, PCOs have had to invest in analog and other outdated technologies. Our system allows them to have an all-digital EchoStar platform. We’ve proven it’s stable and that we’re in it for the long run,” As the parent company, EchoStar, has done since its inception, EchoStar’s MDU division also maintains the mantra: “Traditional cable companies are our true competition.”

EchoStar vendor, Televes, the Spain-based supplier of digital head-ends for EchoStar’s MDU properties, believes in the potential for growth in the U.S. MDU market. Notes Televes’ U.S. managing director, Victor Gestal, “MDU is a huge market. With 25 mil. U.S. MDU properties, we intend to be a big part of that.”

Globecast’s Goals

The latest newcomer to the MDU side of the DBS business in the U.S. is the foreign-content-centric company, Globecast. Because many of its ethnic and foreign-raised subscribers tend to reside in MDUs, Globecast finds the MDU audience to be a natural one in which to invest future resources. Although much of Gloecast’s growth to date has been via individual installs arranged by Globecast’s broadcaster companies, Globecast is today trying to grow its own installer system into one of a “national network of installers.” Globecast’s MDU division recognizes two types of infrastructure, one based upon a pre-existing head-end, the other based upon a rack of set-top boxes that receive signals from a Globecast roof-mounted antenna, which are then distributed by coaxial cable to individual units.

Adds Anna Porteus, Globecast’s director of marketing, business and communications, “Globecast also has a strong relationship with the hotel side of the MDU market, via a quality agreement with Lodgenet. That is another side of our future where we intend to make a strong business.”

Jimmy Schaeffler is the chairman and chief service officer of The Carmel Group, a ten-year-old Carmel-by-the-Sea-based consultancy that focuses on the global multichannel industry. He can be reached at jimmy@carmelgroup.com and (831) 643 2222.