Analysts See Directv Growth Slowing

Future slowdown in subscriber sales and sagging stock prices face DirecTV as it struggles to find permanent place in media landscape, industry analysts said Aug. 16. DBS market king also has become target of cable MSOs such as AT&T Broadband, Comcast, Cox Communications and Time Warner seeking to win back customers lost to DBS providers. "A lot of people want to knock them off their perch," analyst said. Nasty legal fight with DBS rival EchoStar, which filed antitrust suit against DirecTV, also looms.

Despite DirecTV's boundless optimism about finding new subscribers and revenue streams by starting interactive broadband services in tandem with AOL, Blockbuster, Microsoft, National Football League and TiVo in fall, repercussions of "price-based promotions" to boost dish sales will lead soon to "diminishing returns," said satellite analyst William Kidd, managing dir., C.E. Unterberg Towbin. He said weaker consumer market for satellite dishes had led to "drastic increase" in 2nd-half marketing costs for DirecTV, which already is spending $510 for each new customer. "When you do that, promotions work less and less," he said. "You can't get much cheaper than free."

On plus side, DirecTV, spurred by opportunity to beam local TV stations into home markets for first time, steadily has pushed itself up pay TV ladder to trail only cable giants AT&T and Time Warner in customer counts. It recently topped 8.5 million and said it expected to become first DBS provider to reach 10 million by end of year. Some analysts predicted that 6-year-old DirecTV, which is close to turning its first profit, could pass even 2 biggest MSOs by 2005.

DirecTV's $4 billion revenue now accounts for more than 64% of $7.5 billion generated by parent Hughes Electronics, itself unit of auto giant General Motors. Irony of predicament is that Wall St. once viewed DirecTV as star because of soaring subscriber growth that now has slowed dramatically, source said. Rosy forecasts are being scaled back after DirecTV admitted last month that it might fall short of revenue goals for year. With subscriber growth slowing, rural markets near saturation and delays in launches of interactive TV and high-speed data services with AOL, company is facing "important challenge" that will play pivotal role in its future, industry source said.

DirecTV spokesman said public shouldn't be swayed by couple of disappointing months and it would be fairer to judge results on long-term basis.

Looming in background are reports that GM is actively seeking buyer for DirecTV. Analysts believe DirecTV could fetch $50 billion in open market sale. Hughes Senior Vp and DirecTV founder Eddy Hartenstein recently admitted such reports weren't entirely untrue. "Almost everyone has come talking to us," he said: "I would like to see DirecTV become larger. We're looking into all of those kinds of things." Spokesman said company wouldn't comment on extent of talks with possible suitors, but said no deal was imminent.

Selling DirecTV seems to be viable option if company wants to expand its role beyond digital video and sound to offer high-speed data, interactive TV and other broadband services to subscribers. "It makes a lot of sense," industry analyst said. "They have a lot of great assets that could be invaluable to another company." Kidd said sale would come to pass eventually, but it wouldn't "happen any time soon." He said DirecTV's most valuable asset was its subscriber base. "Someone is going to want a satellite footprint," he said: "There are very few distinctive platforms."

Kidd said there was little cause for concern even if company wasn't growing at rate some had forecast. "The future looks good" for DirecTV, he said, but "if you are looking for the growth of 2000 to continue until perpetuity, you are going to be disappointed." He said DBS business would experience usual "peaks and valleys," along with natural deceleration, but DirecTV customer base still would grow at pace of 2-3 million annually before topping off at 20 million.

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