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From AJR,   May 1999  issue

The Making Of a Satellite Behemoth   

DirecTVís purchase of PrimeStar would mean domination of the direct broadcast industry.

By Douglas Gomery
Douglas Gomery is the author of nine books on the economics and history of the media     

Of all the mergers that have been redefining today's TV industry, none will prove more important in the long run than DirecTV's takeover of PrimeStar Partners.

The direct broadcast satellite industry took a significant turn toward consolidation in January, when this agreement was announced. Simply put, second-place PrimeStar Partners declared it was bailing out of the business by selling its assets to top dog DirecTV, in a deal valued at $1.82 billion in cash and stock.

What is direct broadcast satellite, and why should we care about it? The DBS industry delivers cable TV-like service to millions of customers through pizza-sized, 18-inch satellite dishes. DirecTV, for example, delivers more than 185 channels of digital-quality programming to rural Americans living far from cable's wires and to TV fans who think cable's usual 40-plus channels are not enough. Among DBS' offerings are dozens of movie channels and sports from all parts of the nation.

The rhetoric by the industry has been that the sale of PrimeStar Partners is good for customers, because it places DirecTV in a better position to compete with cable. I do not doubt that this competitive boost against cable will be a key secondary effect of the proposed merger. But far more important is that the mid-1990s era of vigorous competition within DBS is over.

That most DBS customers will be in DirecTV's camp may not be a good thing. Once the deal is signed, DirecTV's aggregate subscriber base will grow from about 4.6 million people to some 7 million--well ahead of second-place EchoStar's 2 million. No other player is even close. And EchoStar trails so badly that, ultimately, I don't believe it can survive as a true competitor.

The industry seems destined to become a monopoly in the fashion that cable has been to customers living in any single franchise area.

It seems inevitable that DirecTV will become a corporate behemoth. The company, owned by a subsidiary of General Motors Corp., will become the nation's third largest multi-channel video provider, behind only cable TV's leaders: Time Warner and Tele-Communications Inc.

DirecTV executives hope and expect that additional planned programming innovations--including high-definition digital television, Internet access and interactive services--will help boost annual corporate revenues well into multibillion dollar figures.

DirecTV has already taken aim this year at TV sports junkies by offering programming exclusives, such as the delivery of all the men's NCAA basketball tournament games up to the Final Four. It also will offer all out-of-market NFL games--for additional charges beyond basic installation and monthly fees.

DirecTV also will continue trying to woo movie fans by offering channel after channel of pay-per-view films--playing a large role in the industry's besting of cable rivals on this front.

It can make these offerings because of its deep pockets. Since its launch in 1994 by GM's Hughes Electronic Corp., DirecTV has enjoyed resources rivaled only by giants such as Microsoft. Indeed, DirecTV has done so well that in 1997 Hughes began selling off its defense-related businesses to become a telecommunications and space-focused company.

In a surprise move, EchoStar informally bid $600 million for PrimeStar's high-powered direct broadcast satellite assets.

This seems to be a predatory maneuver at best, intended to drive up the purchase price finally paid by DirecTV and/or delay the deal's closing. But it may have bought time for EchoStar to poach PrimeStar subscribers before DirecTV can approach them directly.

Until the takeover is formally approved by the Federal Communications Commission, EchoStar will offer such bounties as a several hundred dollar rebate to dealers to convert recent PrimeStar subscribers to EchoStar's Dish Network service. Additional promotions will even allow dealers to offer free hardware and installation to tempt PrimeStar's customers. New marketing campaigns will continue through the year to try to persuade customers to do anything but sign with DirecTV.

Look for monthly industry sign-up rates during the second half of 1999 to fall between those rung up in a strong January (more than 200,000 new subscribers) and December 1998--when DBS signed up almost 350,000 new customers.

Meanwhile, DirecTV will herald additional high-power bandwidth, allowing it to offer high-speed data delivery. With a full Internet browser and hard drive, DirecTV will match what the cable industry can do with high-speed modems.

I believe the rosy predictions that DBS will reach 18 million U.S. homes by 2005. And I expect the industry's biggest force will be DirecTV.