DirecTV Readying New VoD Strategies Following Failed Bid for Hulu, CEO Says

DirecTV was reported to be among those bidding around $1 billion for Hulu, a competition said to also have included the Chernin Group in partnership with AT&T; and Guggenheim Digital Media, which was working with KKR & Co. Hulu, which has more than 3 million subscribers and had $700 million in revenue in 2012, ended negotiations after current owners 20th Century Fox, Disney and NBCUniversal agreed to invest another $750 million in the streaming service (CD July 15 p12). DirecTV put together an “aggressive and attractive” offer for Hulu and was “disappointed” that the potential sale was scrapped, White said.

DirecTV put together a digital group 18 months ago to “accelerate” the company’s TV Everywhere strategy, adding on-demand and live streaming, White said. The digital group also has worked to improve DirecTV’s Internet operations and create a common “look and feel” for the service’s user interface across various platforms.

"I think post-Hulu we have had to take a step back and look at other ideas that will probably be more targeted,” White said. “We are certainly looking at some subscription VOD idea.” He declined to give details.

White also appeared to continue to hold the door open to a possible deal with Dish Network in the face of rising programming costs, saying “the world has changed in the past 10 years.” A potential Dish -- then known as EchoStar -- merger with DirecTV was last floated in 2001, but abandoned amid antitrust concerns. Dish Chairman Charlie Ergen last fall said a merger with DirecTV was a “doable deal."

Dish has built up wireless spectrum in the 2 GHz band with the acquisitions of TerreStar and DBSD, holding out the possibility that a combined company would offer a fixed wireless broadband service. White Thursday said DirecTV has “studied” wireless broadband “extensively,” but has no immediate plans to deploy a network. DirecTV in 2011 tested a fixed-line LTE service with Verizon through a small number of homes in Pennsylvania using a device that attached to a satellite dish to receive a 4G signal from a cellular tower. White last fall said it was “too soon to say” what path DirecTV would take in wireless because it was “in the middle of putting something together” for 2013. DirecTV has “no idea” of what wireless strategy Dish will deploy and “I guess we'll all know at some point,” White said.

The potential for cable and satellite industry consolidation has been stirred by rising retransmission fees, which are likely to continue to increase in the “mid-to-high” single digit percent range, White said. “We have done a good job navigating our way through that, but it’s not easy and it requires us to adjust on the fly,” White said. “The longer it goes on for the entire industry, the more the issues it is creating with customers. It’s not going to change in the short run, but it’s not sustainable for any length of time beyond the next couple of years and something is going to have to give."

DirecTV’s Q2 net income fell to $660 million from $711 million in the year-ago quarter as it took a $59 million charge tied to the “deconsolidation” of its DirecTV Sports Network Northwest that stemmed from renegotiations that gave majority ownership to the Seattle Mariners, the company said. Brazil’s currency, the real, also depreciated 10 percent against the dollar, resulting in DirecTV taking a $39 million pre-tax charge in Q2 for currency devaluation. Brazil’s real reached a four-year low against the dollar earlier this week, hitting 2.2905 per dollar.

DirecTV also suffered a higher subscriber churn in Brazil, where 200,000 subscribers were lost during the quarter as a result of the improper crediting of some customer accounts in late 2012 and early 2013, DirecTV said. The customers received retention credits that were “inconsistent” and management there was “appropriately disciplined,” White said. Many of the customers that lost the credits dropped the service, company officials said. Revenue rose to $7.7 billion from $7.2 billion.

In the U.S., DirecTV’s Q2 operating profit grew to $1.24 billion from $1.21 billion as revenue rose to $5.9 billion from $5.6 billion. Monthly average revenue per user improved to $98.73 from $94.40 as churn was flat at 1.53 percent, the company said. DirecTV U.S. lost 84,000 net subscribers, versus a 52,000 loss a year earlier, as gross subscriber additions fell to 839,000 from 863,000 a year earlier. It ended Q2 with 20.02 million subscribers, up from 19.91 million a year ago.

DirecTV Latin America’s Q2 operating profit declined to $139 million from $224 million a year ago as its cash paid for leased equipment jumped to $252 million from $172 million. DirecTV Latin America’s Q2 revenue rose to $1.68 billion from $1.5 billion a year ago despite a decline in monthly average revenue per user to $51.13 from $57.20, the company said. The company’s operating profit margin shrank to 8.2 percent from 14.9 percent a year earlier. Monthly churn jumped to 3.1 percent from 1.8 percent a year earlier overall, the company said. Churn among post-paid customers increased to 2.86 percent from 1.51 percent. DirecTV Latin America’s PanAmericana business’s monthly churn declined to 1.33 percent from 1.4 percent a year ago, but was up sharply in Brazil. About half the PanAmericana segment’s 1.6 million subscribers receiving advanced services also were getting HD programming, company officials said. The HD penetration in Brazil was 31 percent, company officials said. DirecTV Latin America added 165,000 net new subscribers in Q2, down from 645,000 a year earlier, the company said. It ended Q2 with 11 million subscribers, an increase from 9.1 million a year earlier. Sky Mexico, where DirecTV Latin America has a 41 percent stake, ended June with 5.65 million subscribers.