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DirecTV's Hartenstein: Over 10 Million Served

DirecTV Inc. is expected to sign its 10 millionth subscriber this month, seven years after it sold its first direct-broadcast satellite system in Jackson, Miss. Back then, some skeptics thought DBS stood for 'don't be stupid.' Today, cable operators are watching closely to see how DirecTV's next owners will affect competition in the multichannel-video arena. In recent weeks, General Motors Corp. has moved ahead in its negotiations to merge DirecTV parent Hughes Electronics Corp. into News Corp.'s SkyGlobal unit. Meanwhile, EchoStar Communications Corp. has also expressed interest in buying DirecTV. While some consider such a deal a long shot, a merger between the two would create a combined DBS service with more than 16 million subscribers — overshadowing top cable MSOs AT&T Broadband and Time Warner Cable. In an interview with Multichannel News marketing editor Monica Hogan, DirecTV global chairman and Hughes senior executive vice president Eddy Hartenstein talks about the challenges the company faces in getting its next 10 million subscribers. An edited transcript follows:

Multichannel News: What was harder, hitting the first 1 million subscribers or adding No. 10 million?

Eddy Hartenstein:
Getting the second 5 million has been more challenging than the first 5 million. Getting the second 10 will be even more challenging than the first 10. That's just the way the market goes.

MCN: Is your cash flow what you originally projected it should be with 10 million customers?

Hartenstein:
Our revenue is certainly higher. Our shareholders want the higher cash flow. It's all a function of how you keep growing.

If one were to choose to stop growing the business — which we absolutely have not done — you would instantly improve your cash flow. That would undermine what is a huge piece of the value-creation formula for us, which is to continue growing the value of this business. We intend to keep doing that.

MCN: So you don't plan to stop spending aggressively to acquire new subscribers?

Hartenstein:
No. But I would temper that. You need to make sure that as you spend to get new customers, it is well spent — that you're getting them to come on at the right margins, and with the right kind of other subscriber attributes that you want, such as low churn and high margin and revenue potential.

MCN: With the new inter-active-television technologies you're launching, won't subscriber acquisition costs keep going up?

Hartenstein:
Only for those that come on with the advanced set-top boxes, and with that comes a higher revenue per customer. So far, we're seeing what we had predicted in terms of a higher revenue per customer per month on those set-top boxes.

The only question is, how successful and how appealing will it be for people to come on to that platform? Will there be enough interesting applications for them to use? We think so. And we've covered all our bets on that.

MCN: Is there one ITV application that has been most successful for DirecTV?

Hartenstein:
The one that's the broadest-based is the Wink-enabled homes that we already have. It's north of 3 million homes.

Anecdotally, and from anybody that you talk to that has either a TiVo [Inc.]/DirecTV combo box or an UltimateTV [integrated personal-video recorder] — it has totally revolutionized the way they watch TV.

It's sort of, 'Yeah, you can pry that from my cold, dead fingers.'

MCN: Are consumer-electronics retailers losing interest in DirecTV?

Hartenstein:
They're reacting, as I think everyone is in the consumer sector, to a slowed-down pace of consumer spending.

Of the things that they sell, DirecTV is still one of the stars. For any of the advanced products they're selling, whether they're high-definition television sets or advanced interactive platforms, we still lead the way as the best single source to highlight all the other features.

MCN: How much growth do you think is left in the direct-broadcast satellite business, and what percentage of that does DirecTV expect to capture?

Hartenstein:
There is no question that to get to 25 to 30 million homes in the first half of this decade is achievable, and we'll get more than our fair share of it.

MCN: To what extent will DirecTV's growth rate depend on its future ownership?

Hartenstein:
That's a sneaky way of getting into a question that I can't really answer. We've indicated who we're talking to, and for me to speculate on how our plans would change [in the event of a merger] would be premature.

It's safe to say that for anybody that has been interested in talking to us at all — whether we're talking to them now, or over the past six months — the single feature about Hughes that is the most exciting is the growth potential that we give. That's not only on the television side, but on the satellite-delivered broadband side as well.

Anybody that was interested in us, or still is interested in us, is interested in continuing to grow the business and doing so aggressively.

MCN: How have the reports about a possible merger impacted employee morale?

Hartenstein:
I think the morale is fine. As we said in the press release [earlier this month], it's obviously distracted some folks. We need to take responsibility for getting people to get their eyes back on the ball; on the day-to-day customer acquisition, customer retention, and tasks at hand, as opposed to fretting over what's going to happen to us. I'm jumping in and making sure that everybody understands that that's job one.

MCN: How important is it to you that the employee team you've built over the past 10 years is able to remain with DirecTV in the event of a merger?

Hartenstein:
You're asking about a bunch of 'what-if' scenarios on a potential transforming transaction that are just really difficult for me to answer right now.

We've got an excellent management team in place that's gotten us to where we are today, but if you are a student of the evolution of this business and our company, the one big constant that we've had is change.

We're no strangers to that.

Everyone on the management team is vested in and dedicated to maximizing shareholder value here.

MCN: How important is it for DirecTV and its new owners to have a good fit, in terms of corporate culture?

Hartenstein:
With any company, in order to both preserve the value that you have in the company and to grow the company value in the future, there is no more important element.

MCN: In recent weeks, some of the larger media companies have said that they don't need to be in the distribution business. Are there still some benefits that you see in distribution?

Hartenstein:
Obviously, we do. We're serving here, any day now, one out of every 10 households in America for whom we are a very vital lifeline and source for their entertainment and information. The potential for us to continue to grow that base is very high.

MCN: Some Wall Street analysts have said that the deal to merge DirecTV with SkyGlobal would be good for News Corp. chairman Rupert Murdoch, but not necessarily for DirecTV. Are there obvious synergies that they might be missing?

Hartenstein:
The management here, including at GM [Hughes parent General Motors Corp.], are looking at those. We're looking at all aspects of the transactions. To assume that we would not be looking at that would be false.

It would be hard for me, if I were an analyst right now, to give a speculation and an opinion on a deal that I don't know all the details to.

MCN: Do you want to share some of those details today?

Hartenstein:
Sure. Here. What's your fax number? Oh, you're sneaky.

MCN: Could DirecTV continue to compete effectively in the marketplace under GM's corporate umbrella?

Hartenstein:
Oh, absolutely. We're doing it now and we'll continue to do so.

We're not going to do a transaction just for the sake of doing a transaction. We won't do a deal that isn't right.

MCN: Some observers say that a merger between DirecTV and EchoStar would create the strongest possible competition to cable. Do you agree with that?

Hartenstein:
Those kinds of statements are interesting. We have an obligation to our shareholders, notwithstanding the negotiations underway with News Corp., to stay open to anything else that would happen to come across the transom.

Some things come across that have many facets, some different than the facets that we're looking at in a discussion with SkyGlobal. There are regulatory issues, there are business issues, there are financial, economic and tax issues. It's very complex. So we'd be looking at all of those.

MCN: If a merger with EchoStar didn't materialize, is there some way that the remaining DBS companies could work out some kind of spectrum-sharing plan so that both could more effectively deploy local channels and high-definition television?

Hartenstein:
I think that's certainly possible.

MCN: Would cross-ownership with a programming company help or hurt DirecTV?

Hartenstein:
There are other vertically integrated companies out there today — AOL Time Warner [Inc.] is certainly one, Comcast [Corp.] is another. Looking at each one of those, they have, on a range of vertical integration, all done pretty well. It's just a question of the right balance with the particular company.

Can you create added value? Absolutely. The examples I gave you certainly have, and they are stronger entities for the fact that they are both rooted in content and in distribution.

MCN: Can DBS remain a viable competitor to cable?

Hartenstein:
Absolutely. The last differentiator was local channels, and we've got the solution for that now. We'll go to more channels, more markets later this year when we get the first of our two spot-beam satellites up, and it will only keep getting better after that.

We've always been a step ahead of cable. We are still ahead, and we'll leap-frog over them yet again when we complete our local channel build-out and add all these program-synchronous interactive services.

Top that with a better signal quality, a better overall customer-service experience, and that will continue to make a difference.

MCN: What have you learned about consumer demand for broadband since you bought digital-subscriber-line service provider Telocity Inc.?

Hartenstein:
The demand is there. People still have far many more questions about what is broadband. With our re-branding [to DirecTV DSL], we're going to make this very easy.

The first and most obvious customers are the 10 million homes that we're already in. They're going to be offered this service up first, directly, to show them that there's an alternative with a name they can trust, DirecTV DSL.

For those areas that are not within the reach of DSL capability, we've got our satellite-based [DirecWay, formerly DirecPC] product from our HNS [Hughes Network Systems] subsidiary that we can layer in there and bundle together for the customers as well. You'll be seeing that market approach within weeks too.

MCN: Do you expect music downloads to become a revenue stream for DirecTV going forward?

Hartenstein:
We're certainly looking at that.[DirecTV Global Digital Media president] Larry [Chapman]'s got a team working on that.

MCN: Were you surprised at all with the success of your relationship with Blockbuster Inc.?

Hartenstein:
We were very pleased. We have a lot of respect for Blockbuster, their whole management team and how they execute.

MCN: Does hitting the 10 million-subscriber mark help DirecTV attract more advertisers?

Hartenstein:
It absolutely does. We hit sort of a critical mass a year or so ago.

If you look at our subscriber demographics for advertisers on a national basis, it's sort of 'niche national.' It clearly has the broad-based appeal, but a very strong appeal across the mix of channels that we offer ad avails on.

And in a one-stop way, it allows a specific advertiser to go and customize its target audience. We've got the very definition of early adopters, so I think it's going to prove, over time, to have a decent bit of upside for us.

MCN: Do you expect to see a significant revenue stream from television commerce?

Hartenstein:
Yes. But here again, it will be proportional to the number of advanced set-top box platforms that we have out there.

MCN: What kind of consumer response have you had to Spanish-language package DirecTV Para Todos?

Hartenstein:
It's been very strong, very positive. We continue to add channels to that package and distribution partners to that platform. It represents probably the fastest growing and biggest untapped market potential out there.

MCN: Do you think there will be significant media consolidation going forward, or have most of the big deals been done?

Hartenstein:
Major, major consolidation can't happen until there's a relaxation of ownership caps and rules.

As to whether or not those will happen, I'm not smart enough to figure that out, and I frankly don't have the time to sit around and guess on that.

We're going to stay very closely plugged in, and observing, commenting where we think it's important for us to comment, as the landscape changes.

MCN: How are your relationships with the telephone companies today?

Hartenstein:
They're good. They are working on their own priorities. Their No. 1 priority is probably different than our No. 1 priority, but that still can make for a good partnership.

MCN: Do you expect telephone companies to become more involved in video in the future?

Hartenstein:
They've been around the business for a long time. Some people say they're stodgy, slow to move. I think there's a good reason for that, because they are very keenly tuned in to what their own system capabilities are.

They know how to have very good and satisfying relationships with their customers, and we will look at how we can expand our relationship going forward. It's an interesting phenomenon that as providers of DSL now, we are partners in a different way.

MCN: What is DirecTV's biggest challenges going forward?

Hartenstein:
As you get bigger, the challenge is to keep the focus on that which is most important: how to relate everything back to the customer experience.

Whether it's a new channel, a new set-top box, a new service, an improvement to your billing system, an improvement to anything that you're doing — keep the customer in mind. How will they see this, and how do you explain the benefits to both your existing customers and to draw new ones in?

It's basic blocking and tackling — that's the biggest challenge to growing this business from 10 million now, to 15 to 20 million in the future.