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EchoStar's Spending Not Rubbing Off on Subscribers

A plan to boost revenue per customer has yet to reward the satellite TV provider.

EchoStar Communications (DISH) - Get DISH Network Corporation Class A Report is spending a lot of money in a search for higher-class customers.

Problem is, the company hasn't found them yet.

In its latest quarter, EchoStar reported a surprising leap in the amount of money it is paying to acquire new subscribers for its Dish Network satellite TV service, and said it would spend more this year to retain the customers it already has.

It's all part of a plan in which EchoStar -- by offering such advanced goodies as high-definition television and digital video recorders -- is trying to attract customers who will stay longer with Dish and spend more.

Unfortunately, while Dish's average subscriber acquisition cost, or SAC, has grown, the average monthly revenue per subscriber for Dish hasn't risen commensurately. That delay has outsiders wondering whether the disparity signals nothing more than a delayed reaction -- or whether the task of getting customers to spend more is tougher than the company lets on.

Keeping Up With the Murdochs

That weak growth in average monthly revenue per user -- an industry yardstick abbreviated as ARPU, for "average revenue per unit" -- has gotten Wall Street's attention, especially since EchoStar competitor



, now under the influence of global media baron Rupert Murdoch's

News Corporation

(NWS) - Get News Corporation Class B Report

, has been able to increase ARPU along with aggressive spending on SAC.

"Without question," wrote Vintage Research's William Kidd in a recent report, EchoStar's ARPU growth "has to be among the worst, if not the worst," of any major pay television provider, "considering cable companies are not really known for pricing in line with inflation."

EchoStar declined to comment for this story.

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Shares in EchoStar, which fell 48 cents Monday to close at $29.79, are near their 52-week lows, and slid 12% following the release of first-quarter financials earlier this month.

The ARPU problem is articulated by Kidd in a follow-up report to EchoStar's May 6 earnings release for the quarter ended March 31 -- a report that compares EchoStar's historical performance with DirecTV's U.S. operations in a number of relevant areas. (Kidd has a neutral rating on EchoStar, and an outperform rating on DirecTV.)

While EchoStar has traditionally spent less than DirecTV to acquire gross subscriber additions, the differential between the two appears to be shrinking. The $41 difference in the latest quarter -- DirecTV spent $645 per gross add, while EchoStar spent $604 -- is the smallest it's been since the third quarter of 2002, points out Kidd.

Yet, says Kidd, EchoStar wasn't able to cut the differential between the two companies in terms of gross subscriber additions or net additions.

The ARPU differential grew as well, according to Kidd. In the March 31 quarter, EchoStar's ARPU was $51.76, up 16 cents from the prior-year period; DirecTV's U.S. ARPU was $63.60 for the quarter, up $4.50 from the prior year. The ARPU differential "seems to suggest that EchoStar lacks the justification to SAC its subs as heavily as DirecTV, since it's unable to generate comparable ARPUs."

Harpooning ARPU

Certainly, EchoStar sees room for improvement in ARPU. "I'm disappointed where our ARPU is today," CEO Charlie Ergen stated on the company's latest conference call.

The questions then become: What's holding EchoStar's ARPU back, and what can the company do about it?

By offering more sophisticated hardware, such as HDTV and DVRs, EchoStar is hoping to lure a bigger-spending, more loyal customer than it has traditionally attracted. As Ergen said on the company's fourth-quarter conference call -- in the context of spending to retain current customers -- "When we upgrade a customer

to HDTV or DVR, we get an extra revenue stream that we think justifies the incremental retention marketing, so those things make some more sense," according to the CCBN transcript of the call.

Kidd believes that the ARPU problem is EchoStar's "America's Top 60" programming package, which retails for $29.99 per month with a package of local broadcast channels included. "In our opinion, this package is the best value of any pay-TV package that we are aware

of," he writes. "The problem for EchoStar likely is that the AT60, the most popular programming package, is the growth driver ... but probably very problematic in trying to improve the ARPU beyond $50." He writes that on the company's latest conference call, it didn't answer his question of whether it has more AT60 subscribers proportionally today than in years past.

That dovetails with the theory that EchoStar -- which has always positioned itself as a low-cost video provider, most recently in promotions that compare cable operators with pigs -- has a tough time digging its way out of its value-priced position in the market.

Media consultant Peter Litman points to other factors that may be keeping EchoStar's ARPU down. Among hardcore sports fans, for example, EchoStar doesn't have as competitive an offering as DirecTV does, says Litman. "That would represent a challenge in terms of moving upscale," he says.

One EchoStar shareholder, speaking on condition of anonymity, says he isn't worried by the latest ARPU numbers. Holding back ARPU in this quarter, says the longtime EchoStar bull, were free programming promotions which will start tailing off. In addition, says the shareholder, he takes heart from the outspoken Ergen's "uncharacteristically upbeat" outlook on the latest call. "If he was getting a bunch of junk subs, they wouldn't have been upbeat like that," the shareholder says.

In other words, the shareholder simply trusts Ergen to spend money wisely. "From my standpoint," says the buy-sider, "this guy is a net-present-value machine at assessing the net present value of the incremental SAC that he's spending."