Bloomberg News

DirecTV Spurns Dish’s View That Wireless Is Satellite-TV Savior

May 06, 2013

DirecTV President Mike White

DirecTV president Mike White said that "entering the U.S. wireless business isn’t worth the effort because the competition is too entrenched." Photographer: Jonathan Alcorn/Bloomberg

The two largest satellite-television companies in the U.S., after almost two decades of building their businesses with similar strategies, are now heading in almost exactly the opposite directions.

While Dish Network Corp. (DISH:US) is seeking a $25.5 billion takeover of Sprint Nextel Corp. -- a move that would transform the company into a wireless carrier -- rival DirecTV plans to keep investing in the traditional satellite business. Mike White, head of DirecTV, sees his current industry as fundamentally strong, despite facing the same mounting programming costs and slowing U.S. subscriber growth as Dish.

“Wireless, for us, doesn’t make sense,” White, DirecTV’s chief executive officer, said in an interview at the company’s headquarters in El Segundo, California. “We have an amazing product. It’s in-home theater.”

Entering the U.S. wireless business isn’t worth the effort because the competition is too entrenched, White said. In satellite TV, meanwhile, DirecTV (DTV:US) has exclusive programming such as its NFL Sunday Ticket and can use its market lead to get better terms from networks, he said. White’s also looking into more ways to let consumers access programming on mobile devices.

Moreover, millions of viewers are hooked on pay TV, thanks to higher-quality shows such as “Walking Dead” and “Game of Thrones.” It’s too desirable a product to vanish, even if consumers wish they could pay less for it, White said.

“Other than the bill, consumers have to realize this is the golden age of video programming,” White said. “And it’s just getting better.”

Buffett’s Support

DirecTV also has a big supporter in Warren Buffett’s Berkshire Hathaway Inc. The holding company, which held its annual meeting over the weekend, is the fourth-biggest investor in DirecTV, according to data compiled by Bloomberg. White says that Berkshire has endorsed his strategy of sticking with a television focus.

Still, DirecTV’s video-only strategy -- with no Internet or phone network -- may leave it vulnerable to competitors with more variety to offer. The pay-TV industry is also running out of room to grow, already reaching about 90 percent of U.S. households. That’s what’s driving Dish’s push into wireless. Charlie Ergen, the billionaire who co-founded Englewood, Colorado-based Dish and serves as its chairman, has spent years snapping up mobile-phone capacity. He made the offer to Sprint last month.

More consumers want to view video on mobile devices, so it’s a natural for a pay-TV company to team up with a wireless carrier, he argues.

“There’s no one company on a national scale that puts it all together,” Ergen, 60, said last month during a conference call. “The new Dish/Sprint will do that.”

Online Shift

DirecTV, like Dish, has examined packaging TV over the Internet -- a move that would eliminate the cost of installing a satellite dish for every customer. The primary hurdle has been getting access to digital rights to deliver television online. DirecTV last year hired Tony Goncalves to run a brand new digital entertainment group.

Ergen has described the Internet as a threat to traditional pay-TV providers, a concern White said he doesn’t share. If Web companies try to offer services with cheaper packages of channels, for example, DirecTV can match them, he said.

The CEO sipped a Diet Pepsi during the interview last month -- an example of his product loyalty. Before joining DirecTV as CEO in January 2010, White spent about two decades at PepsiCo Inc., including stints as chief financial officer and vice chairman. White, 61, also worked at Bain & Co. in the early 1980s alongside the consulting firm’s co-founder, Mitt Romney, whom he backed in last year’s U.S. presidential campaign.

Original Programming

At DirecTV, White oversees a company with more than 20 million U.S. subscribers, second only to Comcast Corp. among the country’s pay-TV operators. To keep customers loyal, the satellite provider uses exclusive programming such as National Football League games and the Audience Network, whose original shows include crime drama “Rogue” and “Damages,” starring Glenn Close.

While DirecTV has continued to add U.S. customers on an annual basis, growth is more difficult. DirecTV posted its first quarterly net customer loss ever in the three-month period ended in June 2012. Since then, it’s returned to growth, though not at the level of its heyday.

That challenge hasn’t scared off Berkshire, which is run by the third-richest person in the world. The company, known for its investments in stable U.S. businesses such as railroads, HJ Heinz Co. and Coca-Cola Co., owns 6 percent (DTV:US) of outstanding DirecTV shares.

‘Overblown’ Concerns

“Berkshire feels that the U.S. business is undervalued because concerns about technology obsolescence are overblown,” said White, who said he’s in regular contact with the company. “They are long-term investors.”

The investment in DirecTV was engineered by Todd Combs and Ted Weschler, former hedge-fund managers whom Omaha, Nebraska-based Berkshire hired within the past three years to help oversee the company’s $87.7 billion stock portfolio. They declined to comment on DirecTV.

Since Berkshire disclosed its stake in DirecTV on Nov. 14, 2011, shares of the company have risen 27 percent to a record high. Even so, Dish and broader indexes have performed better. The Standard & Poor’s 500 Index gained 29 percent over the same time period, while Dish has climbed 55 percent.

DirecTV’s relative underperformance may be due to a lack of bold transactions, Vijay Jayant, an analyst at ISI Group in New York, said in an interview. DirecTV has kicked the tires on Netflix Inc. (NFLX:US), Hulu Inc. and Vivendi SA (VIV)’s Brazilian phone and Internet unit GVT before passing on all three acquisitions.

Mixed Views

Analysts are split on DirecTV’s outlook. While 14 recommend buying the shares, 11 are neutral and one says to sell.

White said DirecTV’s biggest near-term challenge is rising programming costs, which jumped more than 10 percent this year. DirecTV responded by increasing rates 4.5 percent and adding a regional sports fee of $3 a month in 20 percent of the country.

Customers balked. DirecTV received more e-mails and phone calls in February and March complaining about the price of pay TV than White has seen in years, he said. DirecTV’s first-quarter report, due tomorrow, will show whether it was able to hold on to subscribers.

If the industry can’t work together, consumers may have to take matters into their own hands, White said. Networks will continue to increase programming costs -- and operators will keep passing some of those fees on to customers -- until subscribers either cancel in large numbers or beg Congress to intervene, he said.

Hang Tough

One way to avoid that outcome, said White, is if pay-TV operators stand firm and black out networks as a negotiating tool to keep increases reasonable. DirecTV took Viacom Inc. (VIAB:US) out of its lineup for 10 days in July to avoid a large rate spike.

“I hope enough of us can take a stand to slow down the train before we all crash,” White said. “At some point you’re going to have a revolution, and folks will go to Washington, and we’re going to have more government involvement.”

White has another negotiation coming up with big implications for his customers. DirecTV’s exclusive contract to carry the NFL Sunday Ticket package, which allows viewers access to most pro football games, expires in 2015.

DirecTV pays the NFL about $1 billion a year for the rights to the service, which is purchased by about a 10th of U.S. subscribers. White, who remains in close contact with NFL Commissioner Roger Goodell, stepped out briefly during the interview last month to take a call from him.

Diehard Fans

There’s mutual interest to renew the partnership, White said. Sunday Ticket viewers are some of the company’s best customers, and “we wouldn’t want to lose them,” White said.

Still, DirecTV would consider a nonexclusive deal if the NFL seeks too large of an increase, CFO Pat Doyle said in March.

While the U.S. business focuses on video, the Latin American unit (DTV:US) has dabbled in wireless, snapping up airwaves in government auctions to offer home-phone and Internet plans, though not yet mobile services. The growth potential there makes such investments a better option than in the U.S., White said.

There is one way White could get into the U.S. wireless business -- if he finds himself in a merger with Dish someday.

Ergen said in an October interview that regulators might be more amenable to a merger of the two satellite companies if they were also offering a wireless Internet service, creating a viable competitor to phone and cable carriers. The Justice Department blocked a DirecTV-Dish merger in 2002.

‘Different Dynamic’

“You’ve got a whole different dynamic than 10 years ago,” Ergen said.

White said he hasn’t spoken with Ergen about a merger, although he agreed a combination would be consumer-friendly.

A deal with a combined Dish-Sprint might be DirecTV’s best hope at staying profitable and relevant, said Jayant, who recommends buying Dish and is neutral on DirecTV.

White was quick to compliment Ergen -- who is ranked No. 85 on the Bloomberg Billionaires Index, with a net worth of $12 billion -- even while not endorsing his strategy.

“I respect Charlie,” White said. “He’s been a pretty successful businessman.”

To contact the reporter on this story: Alex Sherman in New York at asherman6@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net


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Companies Mentioned

  • DISH
    (DISH Network Corp)
    • $64.82 USD
    • -0.53
    • -0.82%
  • DTV
    (DIRECTV)
    • $84.55 USD
    • -0.27
    • -0.32%
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