Satellite TV Still in the Picture

Over the past year, I've written many commentaries about the competition between the major cable and telco companies, including AT&T (T - commentary - Cramer's Take), Comcast (CMCSA - commentary - Cramer's Take), Time Warner Cable (TWC - commentary - Cramer's Take) and Verizon (VZ - commentary - Cramer's Take). I've been bullish on all four stocks due to the likely resiliency of their businesses in a weak economic environment, their strong balance sheets and cash flow, and the lack of aggressive price competition, even as subscriber growth has slowed. Among this group, I like AT&T the best right now, which, along with Verizon, has the added benefit of a hefty dividend yield.

One industry that is intimately involved in the competition between cable and telco is direct broadcast satellite. DirecTV (DTV - commentary - Cramer's Take) and Dish Network (DISH - commentary - Cramer's Take) have competed aggressively against cable TV companies for years and have consistently won significant market share. Over the past decade, the satellite companies mostly have been allies of the telcos, bundling their TV product with the telcos' own Internet and telephone services in order to compete with the cable triple play.

The satellite companies still have agreements with telcos, but with the telcos now rolling out their own multichannel TV services on advanced networks across a steadily growing geographic footprint, the satellite companies are getting squeezed. Even so, they remain strong competitors and deserve a closer look as standalone investments and as major players in the cable vs. telco battle.

DirecTV and Dish Network have a combined subscriber base of over 31 million exiting 2008. This compares to about 64 million cable subscribers and several million telco TV subs. There about 110 million TV households in the U.S., bringing multichannel penetration to around 90%.

The satellite companies should be able to grow their combined subscriber base slightly over the next five to 10 years as household growth and penetration continues. Telco TV is projected to steal significant market share from satellite and cable, however, as it builds out its high-speed network, and satellite subscriber growth will be further challenged by its diminishing partnerships with telcos as telcos bring more territory in-house.

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At time of publication, Birenberg was long AT&T in client and personal accounts, although holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.