Quality, control

DirecTV scores good grades for Q3

While cable operators and competitor EchoStar Communications reported weaker-than-expected subscriber momentum for the third quarter, satellite TV giant DirecTV Group did well — a fact that Wall Street observers have been discussing in recent days.

Echoing many of his peers, Goldman Sachs analyst Anthony Noto suggested in a recent report that DirecTV "benefited from a higher-quality subscriber base and stronger execution." The higher-quality users have been "a strong relative benefit during a challenging housing period," he argued.

As a result, Noto boosted his 2007 earnings estimate and user additions estimate for the fourth quarter and 2008. But he also warned that subscriber acquisition and marketing costs will go up for DirecTV due to such factors as EchoStar's tactical missteps, which it will address, "the challenging housing environment and resulting tightening credit quality standards." He concluded that "the video providers are likely to increasingly compete for a smaller pool of potential subscribers."

Kaufman Bros. analyst Todd Mitchell also argued that DirecTV is "benefiting from its focus on affluent households and EchoStar suffering from its exposure to a demographic that is feeling greater economic challenges." He pointed out that average revenue per user at EchoStar is $12 lower than at DirecTV, meaning that the price-sensitive end of the market spectrum remains a key component of its customer base.

"Given the demographics of EchoStar's sub base, its current market offering and its historical financial discipline, we think that over the next couple of quarters EchoStar will continue to generate results that are characterized by lower gross adds than DirecTV and higher churn, albeit down from 1.97% in the third quarter," a bearish Mitchell concluded.

For DirecTV, meanwhile, the analyst raised his user growth outlook to 300,000 net adds in the fourth quarter, a 9% increase from the 275,000 reported in the year-ago period.

Wedbush Morgan Securities analyst William Kidd also had bearish comments for EchoStar and its DISH service in a report that carried the headline: "We were not anticipating DISH to self-destruct this quickly."

Warned Kidd: "Relative to the competition, EchoStar's low value, low price subscriber strategy may finally be showing it has a darker side."