Satellite Pirates Pit EchoStar Against Hughes
George Mannes
07/23/01 - 10:30 AM EDT
Arrrrrghhh! Pirates are stealing gold from the satellite industry's treasure chests, and
EchoStar Communications (DISH Quote) is blaming
Hughes Electronics (GMH Quote) for letting them aboard.
On EchoStar's Thursday earnings conference call, CEO Charlie Ergen said satellite industry growth was being hurt by widespread theft of Hughes'
DirecTV service by people who otherwise would be paying subscription fees to EchoStar or DirecTV. Moreover, Ergen faulted Hughes for inadequate technology and business practices that have made DirecTV a relatively easy target.
DirecTV denies that it's to blame. "Charlie seemed to imply we were lax about our signal integrity efforts, and he's wrong about that," says DirecTV spokesman Robert Mercer.
500,000 Thieves
Ergen's comments throw a spotlight on a major risk for the home satellite business, which hopes to win customers from the ranks of cable TV viewers: Yes, people will sign up for satellite TV. But rather than pay their traditional monthly fee to get service, they'll spend money on illegal tools to avoid the full price.
Over years, piracy could cost EchoStar and DirecTV billions of dollars in lost revenues. On the other hand, the companies could improve their results substantially if they were more successful in combating signal-theft. Certainly every lost customer is sorely missed: Both companies' stocks are down about 35% in the last 12 months, and took fresh hits last week following reports of disappointing subscriber growth.
The extent of satellite piracy is hard to pin down, partly because signal thieves tend not to get chatty with market researchers. One company that has tried to quantify signal theft is telecommunications market research firm Carmel Group. In addition to the 17 million-plus legitimate satellite subscribers the firm expects in the U.S. by the end of 2001, Carmel estimates that 500,000 more people will pay nothing at all for the privilege of watching home satellite TV. And that's a conservative estimate reached with the help of industry executives, says Carmel senior analyst Sean Badding.
Multiplying those 500,000 thieves by an annual household revenue estimate of about $685 gets you to about $340 million in lost revenues annually for the industry. That's not chump change. Analysts surveyed by Thomson Financial/First Call are expecting EchoStar to report $3.9 billion in revenue in 2001, while Hughes says DirecTV will report $5.5 billion to $5.6 billion in revenue for the year.
Can't Truss It
Satellite TV is likely to become more of a target as it grows in popularity, says Badding. As a benchmark, he notes that while cable TV is viewed legally in an about 65 million homes, it's pirated in around 13 million more. Thieves thus amount to about 20% of legitimate cable subscribers, compared with about 3% in the satellite business -- plenty of room for growth.
In addition to Ergen's comments, there has been some anecdotal evidence that satellite piracy is on the upswing. (To be able to watch encrypted satellite programming, legitimate subscribers to either EchoStar or DirecTV need an authorized decoder card that's inserted into the set-top satellite receiver.) Earlier this year,
RadioShack (RSH Quote) said a significant number of people were buying DirecTV systems from the retailer but not activating subscriptions. Non-activations, as Ergen pointed out Thursday, are a sure indicator of piracy, because people not signing up for the service are instead likely buying illegal decoder cards for unscrambling satellite signals. A RadioShack spokeswoman says that RadioShack and Hughes in June revised the two companies' agreement to ensure "higher-quality subscribers" and to mitigate piracy issues.
DirecTV appears to be more of a target for signal hackers than EchoStar does. That's partly because its system is more popular than EchoStar's DISH Network; DirecTV had more than 10 million U.S. subscribers as of June 30, while EchoStar had 6 million. Badding says pirates are also more interested in DirecTV's programming, particularly its exclusive
NFL Sunday Ticket football package.
Moving Forward
Is DirecTV's encryption technology also to blame, as Ergen suggests? That's not clear. Badding says EchoStar's system is "just a little harder to crack." DirecTV's Mercer maintains that "both [Ergen's] system and our system are hack-able."
Ergen also faulted DirecTV for setting up sales promotions and arrangements with retailers that didn't require consumers to activate their subscriptions before stores received compensation for sold systems. DirecTV's agreements, said Ergen, gave salespeople insufficient incentive to steer buyers toward legitimate subscriptions.
Earlier this week, DirecTV president Roxanne Austin told analysts that the company's renegotiated agreement with RadioShack was a step in the right direction. "We'll be looking to work with our other large [consumer electronics] retail partners to focus them on activating subscribers, rather than simply selling set-top boxes," said Austin, who added that defeating piracy would lower the company's subscriber acquisition costs and improve its earnings before interest, taxes, depreciation and amortization.
It's a duel to the death between pirates and satellite companies. Sooner or later someone will be walking the plank.
