July 29, 2008

AT&T Clearing Deck for DBS Partner Deal

Nail-biting time at Dish Network.

By Peter D. Shapiro

In April, AT&T said it would no longer offer DirecTV in its former BellSouth territory, leaving Dish Network “for the near term” as its sole satellite TV provider across the 22-state AT&T footprint. Then, in June, AT&T notified Dish that its distribution contract will terminate at the end of 2008.

This does not mean AT&T will stop offering satellite TV. AT&T now forecasts that U-verse will be built out by end-of-year 2010 to reach 30 million households, up from 11 million today. Even if this is achieved, it would still leave 40%-50% of the households in AT&T’s footprint with no advanced TV option unless AT&T has a satellite TV partner.

Although still needed, satellite TV seems to have lost its magic for AT&T as a draw for new subscribers, which may help to explain why AT&T would want to change its DBS distribution deal. AT&T’s growth in satellite TV connections, net of churn, declined precipitously during the last four quarters, from 140,000 (3Q07), to 130,000 (4Q07), to 116,000 (1Q08), down to just 3,000 (Dish-only 2Q08). AT&T attributes this in part to the greater appeal of U-verse, which gained 318,000 subscribers during the first half of 2008, almost three times AT&T’s net new satellite TV subscribers during this period.

Dish Network has the most to lose if AT&T doesn’t renew. In Dish’s quarterly SEC report for 1Q08, AT&T is credited with producing a “significant percentage” of Dish’s gross new subscribers. Of 730,000 gross ads during 1Q08, Dish gained only 35,000 net new subs. Lacking AT&T distribution, Dish may start to suffer net losses of subscribers.

In Dish’s favor, AT&T’s innovative Homezone product integrates Dish satellite TV and DSL Internet access, in order to provide VOD-like online movie downloads and remote DVR management, among other features. However, Homezone may not swing a big enough tail to wag the Dish dog. Its subscriber count is unreported by AT&T, but is probably nothing to brag about given that it is a subset of newly added Dish subscribers. An AT&T deal with DirecTV would not necessarily mean the end of Homezone, although the Homezone DVR receiver would need to be adapted to work with DirecTV.

DirecTV is probably less desperate than Dish, but nevertheless would benefit from a distribution agreement that covers AT&T’s entire footprint. DirecTV’s earlier arrangement with BellSouth produced 818,000 subscribers by 4Q06, when AT&T’s purchase of BellSouth was consummated and DirecTV subscribers were last reported by AT&T separately from Dish subscribers.

Dish Network or DirecTV? “In terms of AT&T Homezone, it is premature to speculate. AT&T continues to discuss options with Dish, in addition to evaluating other short- and long-term options,” an AT&T spokesperson says.

Peter D. Shapiro is founder and principal at PDS Consulting, a cable & telecoms consultancy (www.pdsconsulting.net). He can be reached at: peter@pdsconsulting.net.