Satellite-television providers, which shook up the pay-TV industry in the 1990s by luring millions of customers away from cable companies, are now struggling to adjust to the technology of the 2010s.
As more Americans shun pricey TV subscriptions and watch video over the Internet, DirecTV (DTV:US) and Dish Network Corp. (DISH:US) are at risk of eventually becoming obsolete. They don’t offer the same high-speed broadband service as their cable and telecom rivals, making it harder to adapt to the world of Web-based television, where robust Internet access is a must.
To cope, DirecTV is working to build its own Web-TV service after losing out on a bid to buy Hulu LLC. Dish, meanwhile, sees salvation in becoming a wireless carrier -- something it tried and failed to accomplish with a Sprint Nextel Corp. takeover this year. Neither approach is a slam dunk because they’re playing catch-up with more established players, and merger partners that could help their efforts are scarce.
“The end game is near,” said Todd Lowenstein, a portfolio manager at Highmark Capital Management, which owns about 450,000 DirecTV shares. “You have a mature and really structurally challenged satellite-TV business. Both companies are thinking about their next steps now.”
DirecTV and Dish have more than 34 million pay-TV customers between them. While they aren’t losing television subscribers at the rates of their cable rivals, they lack other services to insulate them from the industry’s decline.
Comcast Corp. (CMCSA:US), Time Warner Cable Inc., Verizon Communications Inc.’s FiOS and AT&T Inc.’s U-verse use their cable or fiber-optic pipes to deliver phone and broadband access. That means that even if customers stop ordering TV service, the companies can still sell the bandwidth needed to watch Netflix or Hulu.
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Satellite transmissions can’t provide the same level of service because of latency challenges, turning the advantage of the technology on its head. Satellite TV originally expanded access to reams of programming to anyone with a view of the southern part of the sky. Now high-speed Internet services require terrestrial networks to get the full benefit.
While Dish does offer a satellite-based broadband service, the speeds aren’t as fast as what subscribers get from cable companies. Dish’s service, which rolled out last year, has about 310,000 customers.
The satellite providers still managed to add TV customers last year, though at a much slower pace than in their heyday. DirecTV added 199,000 net U.S. subscribers, while Dish gained 89,000. Compare that with 2007, when DirecTV posted 878,000 additions and Dish had 675,000.
This year is expected to be a turning point for pay-TV providers overall. Research firm IHS is projecting that U.S. cable and satellite TV subscriptions will decline in 2013 for the first time, dropping to 100.8 million from 100.9 million.
The slowdown has prompted Dish and DirecTV to hedge their bets. At Dish, co-founder and Chairman Charlie Ergen has been trying to transform his company into a wireless provider for years and already owns a stockpile of airwaves.
What Ergen lacks is a network for mobile devices. The billionaire attempted to acquire one this year by bidding for Clearwire Corp. and then Sprint. Both efforts were rebuffed. Sprint purchased Clearwire on July 9 and then was acquired itself by Japan’s SoftBank Corp. the following day.
Still, Dish hasn’t given up on the idea, Ergen said during a conference call in August. Gaining a wireless business would let the Englewood, Colorado-based company pair its television offerings with mobile phones and tablets, making it easier for customers to watch TV outside the home.
“We’re still very bullish on the wireless side of the business,” Ergen said.
Ergen’s next target is LightSquared Inc., a company backed by fellow billionaire Philip Falcone. Ergen is attempting to buy the bankrupt company to gain its spectrum, a tactic Dish used when it bought TerreStar Networks Inc. and DBSD North America Inc. out of bankruptcy last year.
If he does acquire LightSquared, Ergen would still need a physical network that could handle the spectrum. Dish is considering an acquisition of T-Mobile US Inc. or a partnership with its former merger target Sprint, he said.
Unlike Dish, DirecTV has no plans to become a wireless carrier, Chief Executive Officer Mike White reiterated last month at an investor conference. Instead, DirecTV wants to supplement satellite TV by acquiring or building a subscription video-on-demand service for online use.
The El Segundo, California-based company attempted to acquire such a service by buying Hulu for about $1 billion earlier this year, people with knowledge of the matter said. The effort failed in July when the online-video site decided it no longer wanted to sell itself.
DirecTV is now considering offering its own online service to current customers as an add-on product, said Tony Goncalves, senior vice president of digital entertainment products. Nothing is imminent, though, because the company isn’t yet convinced a product will have wide appeal, he said.
DirecTV also is working with Stamford, Connecticut-based LiveClips to enhance its Sunday Ticket mobile pro-football application and is using technology from i.TV to let people share video on social networks. The company has invested in startup FreeWheel, based in San Mateo, California, to improve the way digital advertising is inserted into video.
DirecTV could still purchase an online television platform, though few opportunities exist, Goncalves said.
“We’ll continue to keep all options open,” he said. “But if we find something that’s both a solid business and unique, we would consider an acquisition.”
Dish also is technologically ready to release an online-video service in the U.S., though it would require lining up the support of programming companies, Ergen said. The company already offers such a service called Dish World, which can stream live TV overseas from any Internet-connected device.
In the end, it may make sense for DirecTV and Dish to face their challenges together, Highmark Capital’s Lowenstein said. A merger of the companies would give the satellite-TV industry more time to adjust to the Internet shift because they wouldn’t have to compete with each other, he said. They also would have more leverage to negotiate lower programming costs.
Both Ergen and White have said they would consider a merger, though any deal would have to be approved by antitrust regulators -- a hurdle the two companies failed to jump in 2002 when they last attempted to tie the knot. The Obama administration’s decisions to block mergers between AT&T and T-Mobile and AMR Corp. and US Airways Group Inc. haven’t given White confidence that a transaction would clear, he said.
“That is a very challenging regulatory environment for any deal to get done from what I can tell,” White said.
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