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DIRECTV, Inc.

DIRECTV, Inc.

2230 East Imperial Highway
El Segundo, California 90245
U.S.A.
Telephone: (310) 535-5000
Toll Free: (800) 531-5000
Fax: (310) 535-5225
Web site: http://www.directv.com

Private Company
Incorporated:
1993
Employees: 1,400
Sales: $7.19 billion (2004)
NAIC: 515210 Cable and Other Subscription Programming

DIRECTV, Inc. is the world's largest satellite television provider, serving nearly 15 million subscribers in the United States and 1.5 million subscribers in Latin America. DIRECTV is owned by The DIRECTV Group, Inc., a publicly traded company that is 34-percent owned by News Corp. subsidiary, Fox Entertainment Group, Inc.

Origins

Residential satellite television got its start in the early 1980s, but it would be years until the business developed into a legitimate industry. Early efforts failed largely because of poor signal quality and insufficient programming, which generally consisted of sporting events. Sports as a mainstay of programming was not at faultthe market appeal of sporting events represented an all-powerful force in the broadcast industrybut the depth and diversity of the programming offered by satellite broadcasters paled against the content provided by cable operators. One of satellite broadcasting's advantages was that it could reach markets and communities cable lines had not reached, which freed satellite operators from competing head to head with cable in some locations. However, catering to the sliver of potential customers in hard to reach areas would never be enough to cover operating costs. To develop into genuine competitors within the broadcast market, satellite operators had to steal business away from cable companies, something their meager programming offerings and scratchy picture quality could not do in the early 1980s. Consumers, by and large, opted for cable boxes on top of their television sets rather than for high-priced, massive satellite dishes in their backyards. The era of residential satellite service, it became apparent, had arrived prematurely. Hughes Electronics Corporation, a unit of General Motors, realized the fundamental flaws of direct broadcast satellite (DBS) service when it first began to develop DBS plans in 1985. The problem of programming could be overcome by forging distribution deals, but the inherent problems of signal clarity and capacity were inescapable. Hughes's position, and with it the market feasibility of DBS service, was transformed by the development of digital compression technology. Digital compression increased the broadcast capacity of satellites by as much as eightfold. Perhaps more important, the new technology produced a much sharper image than earlier satellite broadcasting efforts, sharper, satellite operators could claim, than the picture received by cable customers. The ramifications were profound, suddenly giving DBS operators a chance to profit in a multibillion-dollar market. Hughes, as the largest satellite company in the world, wanted to dominate the market potential created by digital compression technology. Beginning in 1990, Hughes started forming DIRECTV to fulfill its objective, allocating $750 million to fund the company's start-up.

To steward Hughes's entry into DBS, the company picked Eddy W. Hartenstein, a senior project engineer for scientific, commercial, and classified satellite programs for Hughes Aircraft Co. Hartenstein, as the orchestrator of DIRECTV's formation and development, championed the cause of satellite television, acting as the industry's vocal and influential promoter. His first priority as the 1990s got underway was to forge partnerships with other companies, alliances that would give DIRECTV the hardware, software, and the programming to become operational. During the company's formative years, Hartenstein allied DIRECTV with high-profile concerns such as Sony Corporation and Digital Equipment Corporation. Thomson Consumer Electronics (a subsidiary of Thomson S.A.), for instance, entered into an agreement with DIRECTV to manufacture the satellite dishes that would eventually be marketed to consumers. Aside from such major tasks as perfecting the home receiving equipment, getting the programming in place, and, of course, launching a satellite, there were equally important projects such as developing the software systems to control programming, scheduling, billing, and other functions. "This is probably the single most complex television start-up in history," Hartenstein remarked in a March 28, 1994 interview with Broadcasting & Cable. "There is an incredible amount of detail work that we need to do and make sure is working correctly before we turn this on-line and generate revenues," he explained.

As Hartenstein set out, only the problem of picture quality had been resolved from satellite television's previous flawed existence. The problems of programming and hardware costs incurred by the customer remained to be solved, representing two of the most important factors that would determine DIRECTV's fate. The company needed programming that would justify in the minds of consumers the expense of a $700 to $900 satellite dish, and it needed programming capable of luring customers away from cable television providers. The cost of dishes, according to Hartenstein, would fall as more and more people became DIRECTV subscribers, which left obtaining programming as the company's primary objective. Good programming would attract customers, which would drive down the cost of dishes, and, in turn, attract even more customers.

Toward this end, Hartenstein scrambled to secure the programming that would serve as the foundation for DIRECTV's success. In 1993, the company signed distribution agreements with several leading entertainment programmers. The agreements gave DIRECTV the right to distribute programming services owned by The Sci-Fi Channel, TNN: The Nashville Network, CMT: Country Music Television, The Family Channel, USA Network, and Turner Broadcasting. The pursuit of distribution agreements did not stop there, nor would they ever. The company was actively negotiating with other cable programmers, professional and collegiate sports leagues, and movie studios, part of its constant effort to offer satellite viewers more content than cable operators.

First Satellite Launch: 1993

As the deal-making waged on and the operational aspects of DIRECTV's infrastructure gradually came together, a pivotal moment in the company's existence arrived before the end of the year. In December 1993, the company's first satellite was launched, ascending then resting 23,000 miles above the earth. Approximately five times stronger than traditional satellites and capable of transmitting up to eight times as many video signals, the company's first Hughes-built "bird" was soon ready to beam programming and information directly to a DIRECTV home receiving unit, its high-power capabilities requiring a dish, or antenna, measuring only 18 inches. All that remained for the company to become a revenue-generating enterprise was the completion of the 13 major software systems on Earth that controlled DIRECTV's programming, scheduling, and billing.

The date for DIRECTV's DBS service to begin was set for May 1, 1994. In preparation for the momentous event, agreements were reached with 2,000 dealers and 1,000 electronics stores, including Sears and Circuit City, to sell the equipment required for DIRECTV service. Agreements were in place for another 2,000 outlets, including Ward's and Best Buy stores, to sell the service beginning in the fall of 1994. By the end of 1995, Hartenstein wanted to have 8,000 retailers selling the company's pizza-sized satellite dishes. Hartenstein had other target numbers he was trying to reach as the DBS-1 satellite sat positioned in geosynchronous orbit, none more important than the projected break-even point for his pioneering company. According to the company's estimates, three million subscribers paying $30 in monthly subscription fees would push DIRECTV past the point of operating at a loss and usher in profitability. Hartenstein hoped to reach this threshold by late 1996 or early 1997. By 2000, Hartenstein projected there would be ten million DIRECTV subscribers.

Initially, DIRECTV's DBS service was sold in five markets. Expansion into seven states was completed by June 1994, setting up the coast-to-coast launch of DBS service in the fall of 1994. By the time the company rolled out national service, its broadcast capabilities had been bolstered considerably. The DBS-2 satellite was launched in early August 1994, increasing the company's broadcasting capacity to 40 channels of cable programming and 50 pay-per-view channels. A third satellite was launched in mid-1995, making DIRECTV's basic lineup roughly four times the size of cable's offering.

The sale of DIRECTV dishes was brisk at first, aided by the launch of DBS-1 just before the holiday season. The company boasted approximately 350,000 subscribers by the end of 1994, exceeding its expectations, and was gaining new subscribers at a rate of 3,000 per day. It was a promising start, but there was still much to accomplish before Hartenstein could claim a lasting hold on the broadcast market.

Company Perspectives:

DIRECTV is continuing to redefine the world of television entertainment. Advances in technology are enabling our viewers to have greater control over their viewing and experience new services on their television, such as digital video recording (DVR), high-definition TV, expanded multicultural programming, interactive programming and more.

The obvious need was to gain as many new subscribers as possible to reach the point where the company was profitable. How to gain new subscribers proved to be a murkier question, posing a problem with no easy solution and sparking debate among industry analysts and satellite broadcasters alike. The dilemma centered on the long-term value of offering potential customers subsidies on the hardware required to receive DBS service. By reducing the cost of dishes, so the thinking went, more people would be willing to subscribe to satellite service. The greater the subsidies, however, the greater the operating losses became, as the difference between manufacturing costs and what the customer paid for the hardware widened. Considering that DIRECTV was backed by Hughes and General Motors, the company could absorb financial losses that other, less-endowed companies could not sustain, but the use of subsidies had another drawback, one perceived to be more menacing to a company's fortunes than escalating operating losses. Consensus maintained that if subscribers paid less up-front costs, they were likelier to later cancel their subscriptions, or "churn out," because they had made less of a financial investment in the service. Gaining new subscribers in this respect represented artificial growth, causing greater operating losses and a higher churn-out rate, which could render a DBS service provider financially moribund.

The catch-22 of subsidizing subscriber growth presented Hartenstein with a difficult challenge as he set out to increase DIRECTV's subscriber base. Nevertheless, he could take comfort in DIRECTV's stalwart industry position. Roughly a year after launching its service the company ranked as the largest competitor in the DBS television market, far ahead of its closest competitor, Primestar. By June 1995, DIRECTV had more than 500,000 subscribers scattered across the United States, with projections calling for the company to slip past the one-millionth-subscriber mark by the end of 1995. In early 1996, the company gained its first major partner when AT&T Corp. paid $137.5 million for a 2.5 percent stake in the company, kicking off a banner year in which one million new subscribers signed up for DIRECTV. By the end of 1996, revenues reached $621 million, but profitability still eluded the company.

Chasing Growth in the Late 1990s

DIRECTV performed remarkably well in its fourth year of operation, but the celebratory mood that should have pervaded company headquarters in El Segundo, California, was tempered by an anticlimactic air. During the year, the company signed up its three millionth subscriber, reaching the point of projected profitability, but 1997 ended with a loss. In other respects, the company was demonstrating enviable strength. DIRECTV had nearly one million more subscribers than its closest competitor, it controlled nearly 50 percent of the U.S. DBS market, and the company's revenues had more than doubled in 1997, reaching $1.28 billion. The cost of luring new subscribers, however, meant jeopardizing profitability. In an effort to stimulate demand, the company lowered the price of its dish and set-top box to $199, further distancing itself from the threshold of profitability. Although DIRECTV was recording robust growth, some analysts wondered whether the company would accumulate too much in operating losses while it hotly pursued new subscribers.

As the company entered 1998, the word from Hughes was that the company would sacrifice profits to gain new subscribers. One of the major factors prompting the decision was the expected implementation of digital compression technology by the cable industry. In early 1998, the cable industry was beginning to embrace the technology, which as it had for DBS operators, would increase capacity and picture quality. DIRECTV believed it needed to act fast before an important marketing advantage began to lose its strength. In a March 1998 interview with the Los Angeles Business Journal, Mike Smith, Hughes's chairman and chief executive officer, explained: "We have decided to postpone profitability in our DIRECTV business another year because we think it's better to lower our prices and add more subscribers while cable is still vulnerable. They haven't yet gone to digital we are trying to take advantage of this window that we now have."

The actions of DIRECTV during the last years of the 1990s demonstrated its determination to sign up new subscribers. In March 1999, the company began a national retail and marketing promotion to new subscribers that included free installation and three months of free service. The offering helped DIRECTV sign up 120,000 new subscribers in March alone, leading to a record first quarter of 1999 during which more than 300,000 subscribers signed up. A bigger boost to the company's subscriber rolls arrived via acquisition. In January 1999, Hughes announced the acquisition of DIRECTV's major partner, United States Satellite Broadcasting, and DIRECTV's closest competitor, Primestar, as well as the purchase of two high-power satellites. After the deals were completed, DIRECTV's programming selection exceeded 200 channels and its subscriber count swelled to more than seven million.

By August 2000, DIRECTV had more than 8.5 million subscribers, trailing only cable behemoths AT&T Broadband and Time Warner in the number of multichannel video subscribers. According to company projections, DIRECTV expected to reach ten million subscribers by the end of the year. Although the company was close to turning a profit, some analysts were worried by slackening new subscriber growth, while other analysts offered a more optimistic perspective, pointing to potential growth that could witness DIRECTV catapulting past AT&T Broadband and Time Warner by 2005.

Key Dates:

1990:
Hughes Electronics Corporation begins formulating plans for DIRECTV.
1993:
First DIRECTV satellite is launched.
1994:
DIRECTV's programming is beamed to subscribers for the first time.
1996:
A record one million subscribers sign up during the year.
1999:
Primestar and United States Satellite Broadcasting are acquired.
2003:
Rupert Murdoch's News Corp. acquires a 34 percent, controlling interest in DIRECTV.
2004:
DIRECTV acquires Pegasus Communications and the National Rural Telecommunications Cooperative, gaining 1.4 million new subscribers.

A New Owner in the 21st Century

The first half of the new decade saw dramatic changes in the U.S. pay-television market, as competition intensified, new technologies emerged, and new management teams battled against one another for supremacy. The period was most noteworthy for the massive deals completed that put new owners in charge of the country's premier cable and satellite companies. On the cable side, AT&T Broadband bowed out after Comcast Corporation acquired its cable and Internet operations for a staggering $54 billion in late 2002, giving DIRECTV's most formidable foe a new name. On the satellite side, DIRECTV found itself to be the object of someone else's fancy as well after General Motors put Hughes Electronics on the auction block in 2000. The announcement attracted the attention of media mogul Rupert Murdoch, who had been trying to establish a presence in the U.S. DBS market since 1983. Murdoch, through his company, News Corp., owned or controlled media businesses that generated $30 billion in annual revenue, presiding over an empire that published 175 newspapers, delivered television programming in five continents, and, in the United States, owned 35 television stations, the Twentieth Century Fox studio, and the Fox Network. Murdoch desperately wanted DIRECTV, but the pursuit took persistence, resulting in a three-year chase that underscored the value of DIRECTV's hold on the DBS market.

Murdoch and General Motors struggled to come to terms over the fate of DIRECTV. For 18 months, the parties negotiated the particulars of the deal, but they were unable to agree on a price. At this point, EchoStar Communications Corp., led by Charles Ergen, entered a bid for Hughes Electronics, exacerbating Murdoch's frustration. In 1997, Ergen and Murdoch had attempted to join forces in the satellite business, one of a handful of attempts by Murdoch to secure a foothold in the U.S. DBS market, but the partnership flared, according to reports, into a bitter rivalry. Ergen surprised industry onlookers by raising $26 billion, enough to gain General Motors' nod of approval in October 2001, but Murdoch refused to give up his fight. He marshaled his forces to mount a challenge against the proposed transaction, sending lobbyists to the U.S. Congress and to the Federal Communications Commission to undermine Ergen's attempt to acquire DIRECTV. Murdoch prevailed, achieving his objective in December 2002 when the U.S. Justice Department ruled that the combination of the two satellite companies would be anti-competitive. With the interdictive assault by Ergen brushed aside, Murdoch renewed talks with General Motors, reaching an agreement with the car maker to acquire a 34 percent controlling stake in Hughes Electronics in April 2003. After review by regulatory authorities, the deal closed in December 2003, giving Murdoch control of a U.S. satellite company after 20 years of failed attempts.

In the aftermath of the pivotal deal, DIRECTV entered a new era of existence, one supported by the massive resources at Murdoch's disposal. The name of the company's parent company was changed from Hughes Electronics Corp. to The DIRECTV Group, Inc. Ownership of The DIRECTV Group, and by extension, DIRECTV, Inc., was passed from News Corp. to one of its subsidiaries, Fox Entertainment Group, Inc. Mitchell Stern, the chief executive officer of the Fox TV Stations Group, was assigned to head DIRECTV's operations, working under Chase Carey, who was appointed chief executive officer of The DIRECTV Group. Carey ordered sweeping changes for the operations he inherited, shedding nearly every asset that was not related to satellite broadcasting. He sold DIRECTV's 80 percent interest in satellite-launch service PanAmSat for $2.6 billion, divested the company's set-top-box manufacturing division, and cut its holdings in XM Satellite Radio. After the streamlining efforts, which included reducing DIRECTV's headquarters payroll by roughly 50 percent, Carey spent $1.4 billion to acquire two rural satellite companies, Pegasus Communications and the National Rural Telecommunications Cooperative.

Under Murdoch's control, DIRECTV's subscriber rolls swelled at an accelerated rate, but it continued to suffer from a high churn rate and a lack of profits. The company's strategy of adding new subscribers at the expense of short-term profitability, essentially subsidizing its expansion, continued under Murdoch's rule, aping the strategy he employed with the British Sky Broadcasting Group (BSkyB). Once Murdoch gained a controlling interest in BSkyB, he invested heavily in technology as a lure to attract customers, at one point losing $1 billion to provide viewers with digital boxes. He was expected to do the same with DIRECTV by wresting subscribers away from cable with technological offerings. In many respects, the strategy underpinning DIRECTV before and after News Corp. took control was the same, but with the enormous financial resources and renowned managerial skills of Murdoch supporting and guiding DIRECTV's fortunes, the company's hopes for a successful future were brighter than at any point in its past.

Principal Subsidiaries

DIRECTV Holdings, LLC; DIRECTV Financing Co., Inc.; DIRECTV Enterprises, LLC; DIRECTV Customers Services, Inc.; DIRECTV Programming Holdings I, Inc.; DIRECTV Programming Holdings II, Inc.; DIRECTV Merchandising, Inc.; DIRECTV Operations, LLC; DIRECTV International Inc.; DIRECTV Latin America Holdings, Inc.; DIRECTV Mexico Holdings, LLC; DIRECTV Trinidad Limited (Trinidad/ Tobago); DIRECTV Latin America, LLC.

Principal Competitors

Comcast Corporation; EchoStar Communications Corporation; Time Warner Cable Inc.

Further Reading

Albiniak, Paige, "Growth Comes at a Cost: DIRECTV Is Growing but Needs Expensive Customer Incentives to Do IT," Broadcasting & Cable, November 29, 2004, p. 26.

, "Murdoch's 21-Year Quest: That's How Long It Took News Corp. Titan to Gain Control of a DBS Operation," Broadcasting & Cable, November 29, 2004, p. 30.

Amdur, Meredith, "Fox Stations Chief Set to Head DIRECTV," Daily Variety, November 24, 2003, p. 6.

Brown, Rich, "Dishing Up Full Power," Broadcasting & Cable, March 28, 1994, p. 48.

Colman, Price, "A Mixed Bag for DBS: While Subscribers and Revenue Are Growing, Industry Faces Variety of Challenges," Broadcasting & Cable, June 9, 1997, p. 41.

, "No Laurel-Resting for DirecTV's Hartenstein," Broadcasting & Cable, November 3, 1997, p. 52.

Crespo, Mariana, "'You Get More Eyeballs,'" Financial World, February 14, 1995, p. 94.

"DIRECTV Launches First of 4 Next-Gen HD Satellites," Online Reporter, April 30, 2005, p. 3.

"DIRECTV Turns Quarterly Profit, Keeps Adding Subscribers," Online Reporter, August 6, 2005, p. 5.

Dziatkiewicz, Mark, "The One to Watch," America's Network, June 15, 1995, p. 55.

"Eddy Hartenstein," Satellite Communications, July 1993, p. 26.

Fine, Howard, "Smith on Mission to Beat Cable with DirecTV," Los Angeles Business Journal, March 9, 1998, p. 3.

Gorchov, Jolie, "Satellite TV Gets Boost, but Cable Still Has an Edge," Los Angeles Business Journal, December 13, 1999, p. 8.

Green, Michelle Y., "The DirecTV System, How It Works," Broadcasting & Cable, May 31, 1999, p. 24.

, "Sitting on Top of the World," Broadcasting & Cable, May 31, 1999, p. 4.

Grover, Richard, "Rupert's World," Business Week, January 19, 2004, p. 52.

Krause, Reinhardt, "Murdoch's Channeled His DIRECTV Efforts into Taking Subscribers from Cable Firms," Investor's Business Daily, August 6, 2004, p A1.

, "Satellite TV Plans an Offensive Aimed at Better Local Channels," Investor's Business Daily, August 30, 2005, p. A4.

La Franco, Robert, "The Unlikely Mogul," Forbes, November 30, 1998, p. 52.

Lashinsky, Adam, "Murdoch's Air War," Fortune, December 13, 2004, p. 130.

Maney, Kevin, "Revolution from on High," Canadian Business, June 1995, p. 81.

Mermigas, Diane, "Hughes Denies DirecTV Spinoff; Parent Company Seeks Acquisitions to Complement Its Satellite Service," Electronic Media, June 12, 2000, p. 3.

"News Corp. to Sell Sky Latin America to Partly-Owned DIRECTV," AsiaPulse News, October 12, 2004.

Potkewitz, Hilary, "Leaner DIRECTV Facing Challenges of Churn," Los Angeles Business Journal, March 14, 2005, p. 1.

Sherman, Jay, "DIRECTV Churn Dismays Wall St.," TelevisionWeek, November 8, 2004, p. 15.

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DIRECTV, Inc.

DIRECTV, Inc.

2230 East Imperial Highway
El Segundo, California 90245
U.S.A.
Telephone: (310) 535-5000
Toll Free: (800) 531-5000
Fax: (310) 535-5225
Web site: http://www.directv.com

Private Subsidiary of Hughes Electronics Corporation
Incorporated:
1993
Employees: 1,400
Sales: $3.78 billion (1999)
NAIC: 51322 Cable and Other Program Distribution

DIRECTV, Inc. is the largest direct broadcast satellite service provider in the United States, delivering more than 200 channels of programming to more than nine million subscribers in the United States and to one million subscribers in Latin America. Programming includes movies, sports, music, and general interest content that subscribers receive via an 18-inch satellite dish and a set-top receiver. DIRECTV is owned by Hughes Electronics Corporation, a unit of General Motors Corporation.

Origins

Residential satellite television got its start in the early 1980s, but it would be years until the business developed into a legitimate industry. Early efforts failed largely because of poor signal quality and insufficient programming, which generally consisted of sporting events. Sports as a mainstay of programming was not at faultthe market appeal of sporting events represented an all-powerful force in the broadcast industrybut the depth and diversity of the programming offered by satellite broadcasters paled against the content provided by cable operators. One of satellite broadcastings advantages was that it could reach markets and communities cable lines had not reached, which freed satellite operators from competing head to head with cable in some locations. However, catering to the sliver of potential customers in hard to reach areas would never be enough to cover operating costs. To develop into genuine competitors within the broadcast market, satellite operators had to steal business away from cable companies, something their meager programming offerings and scratchy picture quality could not do in the early 1980s. Consumers, by and large, opted for cable boxes on top of their television sets rather than for high-priced, massive satellite dishes in their backyards. The era of residential satellite service, it became apparent, had arrived prematurely.

Hughes Electronics Corporation, a unit of General Motors, realized the fundamental flaws of direct broadcast satellite (DBS) service when it first began to develop DBS plans in 1985. The problem of programming could be overcome by forging distribution deals, but the inherent problems of signal clarity and capacity were inescapable. Hughess position, and with it the market feasibility of DBS service, was transformed by the development of digital compression technology. Digital compression increased the broadcast capacity of satellites by as much as eightfold. Perhaps more important, the new technology produced a much sharper image than earlier satellite broadcasting efforts, sharper, satellite operators could claim, than the picture received by cable customers. The ramifications were profound, suddenly giving DBS operators a chance to profit in a multibillion-dollar market. Hughes, as the largest satellite company in the world, wanted to dominate the market potential created by digital compression technology. Beginning in 1990, Hughes started forming DIRECTV to fulfill its objective, allocating $750 million to fund the companys start-up.

To steward Hughess entry into DBS, the company picked Eddy W. Hartenstein, a senior project engineer for scientific, commercial, and classified satellite programs for Hughes Aircraft Co. Hartenstein, as the orchestrator of DIRECTVS formation and development, championed the cause of satellite television, acting as the industrys vocal and influential promoter. His first priority as the 1990s got underway was to forge partnerships with other companies, alliances that would give DIRECTV the hardware, software, and the programming to become operational. During the companys formative years, Hartenstein allied DIRECTV with high-profile concerns such as Sony Corporation and Digital Equipment Corporation. Thomson Consumer Electronics (a subsidiary of Thomson S.A.), for instance, entered into an agreement with DIRECTV to manufacture the satellite dishes that would eventually be marketed to consumers. Aside from such major tasks as perfecting the home receiving equipment, getting the programming in place, and, of course, launching a satellite, there were equally important projects such as developing the software systems to control programming, scheduling, billing, and other functions. This is probably the single most complex television start-up in history, Hartenstein remarked in a March 28, 1994 interview with Broadcasting & Cable. There is an incredible amount of detail work that we need to do and make sure is working correctly before we turn this on-line and generate revenues, he explained.

As Hartenstein set out, only the problem of picture quality had been resolved from satellite televisions previous flawed existence. The problems of programming and hardware costs incurred by the customer remained to be solved, representing two of the most important factors that would determine DIRECTVS fate. The company needed programming that would justify in the minds of consumers the expense of a $700 to $900 satellite dish, and it needed programming capable of luring customers away from cable television providers. The cost of dishes, according to Hartenstein, would fall as more and more people became DIRECTV subscribers, which left obtaining programming as the companys primary objective. Good programming would attract customers, which would drive down the cost of dishes, and, in turn, attract even more customers.

Toward this end, Hartenstein scrambled to secure the programming that would serve as the foundation for DIRECTVS success. In 1993, the company signed distribution agreements with several leading entertainment programmers. The agreements gave DIRECTV the right to distribute programming services owned by The Sci-Fi Channel, TNN: The Nashville Network, CMT: Country Music Television, The Family Channel, USA Network, and Turner Broadcasting. The pursuit of distribution agreements did not stop there, nor would they ever. The company was actively negotiating with other cable programmers, professional and collegiate sports leagues, and movie studios, part of its constant effort to offer satellite viewers more content than cable operators.

First Satellite Launch: 1993

As the deal making waged on and the operational aspects of DIRECTVS infrastructure gradually came together, a pivotal moment in the companys existence arrived before the end of the year. In December 1993, the companys first satellite was launched, ascending then resting 23,000 miles above the earth. Approximately five times stronger than traditional satellites and capable of transmitting up to eight times as many video signals, the companys first Hughes-built bird was soon ready to beam programming and information directly to a DIRECTV home receiving unit, its high-power capabilities requiring a dish, or antenna, measuring only 18 inches. All that remained for the company to become a revenue-generating enterprise was the completion of the 13 major software systems on Earth that controlled DIRECTVS programming, scheduling, and billing.

The date for DIRECTVS DBS service to begin was set for May 1, 1994. In preparation for the momentous event, agreements were reached with 2,000 dealers and 1,000 electronics stores, including Sears and Circuit City, to sell the equipment required for DIRECTV service. Agreements were in place for another 2,000 outlets, including Wards and Best Buy stores, to sell the service beginning in the fall of 1994. By the end of 1995, Hartenstein wanted to have 8,000 retailers selling the companys pizza-sized satellite dishes. Hartenstein had other target numbers he was trying to reach as the DBS-1 satellite sat positioned in geosynchronous orbit, none more important than the projected break-even point for his pioneering company. According to the companys estimates, three million subscribers paying $30 in monthly subscription fees would push DIRECTV past the point of operating at a loss and usher in profitability. Hartenstein hoped to reach this threshold by late 1996 or early 1997. By 2000, Hartenstein projected there would be ten million DIRECTV subscribers.

Initially, DIRECTVS DBS service was sold in five markets. Expansion into seven states was completed by June 1994, setting up the coast-to-coast launch of DBS service in the fall of 1994. By the time the company rolled out national service, its broadcast capabilities had been bolstered considerably. The DBS-2 satellite was launched in early August 1994, increasing the companys broadcasting capacity to 40 channels of cable programming and 50 pay-per-view channels. A third satellite was launched in mid-1995, making DIRECTVS basic lineup roughly four times the size of cables offering.

The sale of DIRECTV dishes was brisk at first, aided by the launch of DBS-1 just before the holiday season. The company boasted approximately 350,000 subscribers by the end of 1994, exceeding its expectations, and was gaining new subscribers at a rate of 3,000 per day. It was a promising start, but there was still much to accomplish before Hartenstein could claim a lasting hold on the broadcast market.

Key Dates:

1990:
Hughes Electronics Corporation begins formulating plans for DIRECTV.
1993:
First DIRECTV satellite is launched.
1994:
DIRECTVS programming is beamed to subscribers for the first time.
1996:
A record one million subscribers sign up during the year.
1999:
Primestar and United States Satellite Broadcasting are acquired.

The obvious need was to gain as many new subscribers as possible to reach the point where the company was profitable. How to gain new subscribers proved to be a murkier question, posing a problem with no easy solution and sparking debate among industry analysts and satellite broadcasters alike. The dilemma centered on the long-term value of offering potential customers subsidies on the hardware required to receive DBS service. By reducing the cost of dishes, so the thinking went, more people would be willing to subscribe to satellite service. The greater the subsidies, however, the greater the operating losses became, as the difference between manufacturing costs and what the customer paid for the hardware widened. Considering that DIRECTV was backed by Hughes and General Motors, the company could absorb financial losses that other, less-endowed companies could not sustain, but the use of subsidies had another drawback, one perceived to be more menacing to a companys fortunes than escalating operating losses. Consensus maintained that if subscribers paid less up-front costs, they were likelier to later cancel their subscriptions, or churn out, because they had made less of a financial investment in the service. Gaining new subscribers in this respect represented artificial growth, causing greater operating losses and a higher churn-out rate, which could render a DBS service provider financially moribund.

The catch-22 of subsidizing subscriber growth presented Hartenstein with a difficult challenge as he set out to increase DIRECTVS subscriber base. Nevertheless, he could take comfort in DIRECTVS stalwart industry position. Roughly a year after launching its service the company ranked as the largest competitor in the DBS television market, far ahead of its closest competitor, Primestar. By June 1995, DIRECTV had more than 500,000 subscribers scattered across the United States, with projections calling for the company to slip past the one-millionth-subscriber mark by the end of 1995. In early 1996, the company gained its first major partner when AT&T Corp. paid $137.5 million for a 2.5 percent stake in the company, kicking off a banner year in which one million new subscribers signed up for DIRECTV. By the end of 1996, revenues reached $621 million, but profitability still eluded the company.

Chasing Growth in the Late 1990s

DIRECTV performed remarkably well in its fourth year of operation, but the celebratory mood that should have pervaded company headquarters in El Segundo, California, was tempered by an anticlimactic air. During the year, the company signed up its three millionth subscriber, reaching the point of projected profitability, but 1997 ended with a loss. In other respects, the company was demonstrating enviable strength. DIRECTV had nearly one million more subscribers than its closest competitor, it controlled nearly 50 percent of the U.S. DBS market, and the companys revenues had more than doubled in 1997, reaching $1.28 billion. The cost of luring new subscribers, however, meant jeopardizing profitability. In an effort to stimulate demand, the company lowered the price of its dish and set-top box to $199, further distancing itself from the threshold of profitability. Although DIRECTV was recording robust growth, some analysts wondered whether the company would accumulate too much in operating losses while it hotly pursued new subscribers.

As the company entered 1998, the word from Hughes was that the company would sacrifice profits to gain new subscribers. One of the major factors prompting the decision was the expected implementation of digital compression technology by the cable industry. In early 1998, the cable industry was beginning to embrace the technology, which as it had for DBS operators, would increase capacity and picture quality. DIRECTV believed it needed to act fast before an important marketing advantage began to lose its strength. In a March 1998 interview with the Los Angeles Business Journal, Mike Smith, Hughess chairman and chief executive officer, explained: We have decided to postpone profitability in our DIRECTV business another year because we think its better to lower our prices and add more subscribers while cable is still vulnerable. They havent yet gone to digital we are trying to take advantage of this window that we now have.

The actions of DIRECTV during the last years of the 1990s demonstrated its determination to sign up new subscribers. In March 1999, the company began a national retail and marketing promotion to new subscribers that included free installation and three months of free service. The offering helped DIRECTV sign up 120,000 new subscribers in March alone, leading to a record first quarter of 1999 during which more than 300,000 subscribers signed up. A bigger boost to the companys subscriber rolls arrived via acquisition. In January 1999, Hughes announced the acquisition of DIRECTVS major partner, United States Satellite Broadcasting, and DIRECTVS closest competitor, Primestar, as well as the purchase of two high-power satellites. After the deals were completed, DIRECTVS programming selection exceeded 200 channels and its subscriber count swelled to more than seven million.

By August 2000, DIRECTV had more than 8.5 million subscribers, trailing only cable behemoths AT&T and Time Warner in the number of multichannel video subscribers. According to company projections, DIRECTV expected to reach ten million subscribers by the end of the year. Although the company was close to turning a profit, some analysts were worried by slackening new subscriber growth, while other analysts offered a more optimistic perspective, pointing to potential growth that could witness DIRECTV catapulting past AT&T and Time Warner by 2005. As it had been since the companys inception, DIRECTVS future was clouded by numerous factors. However, few could deny the companys strident progress and its entrenched market position. If direct-to-home satellite television came to dominate the nations media landscape, no company stood better poised than DIRECTV to reap a lions share of the financial rewards.

Principal Subsidiaries

DIRECTV Latin America.

Principal Competitors

AT&T Broadband, LCC; Echostar Communications Corporation; Time Warner Inc.

Key Dates:

1990:
Hughes Electronics Corporation begins formulating plans for DIRECTV.
1993:
First DIRECTV satellite is launched.
1994:
DIRECTVS programming is beamed to subscribers for the first time.
1996:
A record one million subscribers sign up during the year.
1999:
Primestar and United States Satellite Broadcasting are acquired.

Further Reading

Brown, Rich, Dishing Up Full Power, Broadcasting & Cable, March 28, 1994, p. 48.

Colman, Price, A Mixed Bag for DBS: While Subscribers and Revenue Are Growing, Industry Faces Variety of Challenges, Broadcasting & Cable, June 9, 1997, p. 41.

, No Laurel-Resting for DirecTVs Hartenstein, Broadcasting & Cable, November 3, 1997, p. 52.

Crespo, Mariana, You Get More Eyeballs, Financial World, February 14, 1995, p. 94.

Dziatkiewicz, Mark, The One to Watch, Americas Network, June 15, 1995, p. 55.

Eddy Hartenstein, Satellite Communications, July 1993, p. 26.

Fine, Howard, Smith on Mission to Beat Cable with DirecTV, Los Angeles Business Journal, March 9, 1998, p. 3.

Gorchov, Jolie, Satellite TV Gets Boost, but Cable Still Has an Edge, Los Angeles Business Journal, December 13, 1999, p. 8.

Green, Michelle Y., The DirecTV System, How It Works, Broadcasting & Cable, May 31, 1999, p. 24.

, Sitting on Top of the World, Broadcasting & Cable, May 31, 1999, p. 4.

La Franco, Robert, The Unlikely Mogul, Forbes, November 30, 1998, p. 52.

Maney, Kevin, Revolution from on High, Canadian Business, June 1995, p. 81.

Mermigas, Diane, Hughes Denies DirecTV Spinoff; Parent Company Seeks Acquisitions to Complement Its Satellite Service, Electronic Media, June 12, 2000, p. 3.

Jeffrey L. Covell

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