Electricity Crisis Might Hurt More Than DBS
Direct-broadcast satellite has been a formidable competitor to cable operators, but analog and digital cable numbers are still growing. Telephone companies have taken their share of cable's high-speed data business, though cable operators keep adding new data customers every week. But neither of those competitors has the potential to dent the bottom line like the looming power crisis, a preview of which is currently unfolding in California, but it is sure to spread to other states.
Residents of the Golden State are being hit with a triple whammy. Analysts say gas prices will soon be at $3 per gallon, and natural-gas prices have already soared. The next, biggest hit comes this month: the California Public Utilities Commission has approved a $5.7-billion rate hike, which will lead to an increase in already high residential bills from $4 to $85 per household.
The bills hitting in June will be balloons. The PUC approved the hike retroactive to March, so that first inflated assessment is likely to force some consumers to weigh lighting the lamps and cooling the food versus surfing the Internet or watching The Sopranos.
Already, California's problems are having an impact beyond state lines. On May 9, a Pacific Gas & Electric power failure shut out users of Yahoo's instant messaging, games and chat functions because the redundant power of Yahoo's data center vendor, Exodus Communications Inc. in Sunnyvale, failed. Yahoo's features were unavailable for more than an hour.
How did California, ever the trendsetter, reach the brink of recession first? A myriad of reasons, led by the legislatively-endorsed electric deregulation. The preferred formula was one that capped rates charged by utility companies to consumers, but left unchecked the rates power generators can pay to utility distributors.
The growth of the Internet contributed, too. Demand for electricity has increased 6 percent a year for the past five years, according to the California Independent Systems Operators (CalISO), the agency which is the traffic cop for state-generated and purchased energy in the state. A large percentage of that is due to the location in the state of Internet business. Internet use and support accounts for 8 percent of power used nationally.
Because of these factors, California has depleted its reserves and now imports 25 percent of its energy and still can't satisfy demand. The state experienced multiple blackouts, in one-hour increments, in January and a few in March.
Adding to the problem, a relatively dry winter has left a low snow pack, so hydroelectric power will not be able to service the state if it's hit with a hot summer.
CalISO has predicted up to 110 hours of blackouts this summer, a number the California Manufacturers and Technology Association calls a conservative, best-case scenario. That could result in an estimated $21.8 billion in lost productivity in the state, according to a report for the trade association by AUS Consultants of New Jersey. The report was based on interviews with companies across 25 business sectors.
The report predicts the loss of 134,000 jobs and an average loss of $104 per household in the state, based on higher product costs, and wage and job cutbacks. That makes for a tough environment in which to sell consumers new, more-expensive services.
TV NEEDS POWER, TOO
It's hard to see an upside — for cable or anyone else. Activists are attacking local utility taxes, seeking their repeal as a way to provide some consumer relief. These local taxes unbalance the scale between cable, which, depending on the community, must pay them and pass them through to end-users, and DBS, which is not subjected to these local taxes. They range from 1 percent to 12 percent.
It seems unlikely that consumers would curtail high-speed data or cable-TV use to save on power costs, although the state is urging consumers to cut back their use of all electric devices to forestall blackouts.
According to the power companies, a computer and monitor costs about 4 cents an hour (based on 10 cents per kilowatt-hour) to operate. A TV in use all day racks up $1 in power costs. Heating and air conditioning uses 15 kilowatts an hour. And a refrigerator eats 400 kilowatts an hour.
Some marketers suggest cable operators can spin the conservation message to the benefit of the business. One firm, SCDRG Inc. of Irvine, Calif., suggested several strategies, such as emphasizing the power benefit of pay-per-view versus the cost of driving to the video store.
Companies could remind consumers to check PPV grids before they go to the store and reward them with anything from a bill thank-you to a perk for using the services.
But a check of some of California's operators found none were launching conservation-linked strategies.
Executives note that, historically, cable is seen as recession resistant.
"Utilities could have an impact, but we've not seen it," Charter Communications Inc. CEO Jerry Kent said. The price-value relationship is still strong, he added. Cable's focus on bundling and discounting services helps the industry feel "insulated," he added.
In the first January-to-March quarter, Charter reported 7,000 digital installs a week.
Tom Schaeffer, Charter's Western Region senior vice president of operations, noted that in past economic downturns, cable's numbers have actually gone up. "We don't anticipate any downsizing, but we might grow a little slower," he said.
Oddly, the power crisis could hit operators differently, depending on the location of their systems.
HARD TIMES IN LONG BEACH
Charter's systems in Burbank and Glendale could have an easier summer than their counterpart in Long Beach. The former two communities have municipal power systems, which to date have not had rolling blackouts. Long Beach is served by the financially teetering Southern California Edison.
That factor is good news for programmers such as Burbank-based Disney Channel. Local power supply has kept the crunch from impacting that channel or its sisters Toon Disney and SoapNet. The company long ago installed redundant back-up power generators to ensure continuity of service, according to a spokeswoman.
E! Entertainment Television also benefits from being served by the Department of Water and Power for the city of Los Angeles. Like most California businesses, E! took measures long before the current crisis to provide for uninterruptable power supply. The network, which uplinks original programming taped daily at is Los Angeles office, has two 250-kilowatt generators running parallel. "Just think of two giant car batteries," said Jack Carey the senior vice president of technology and operations at the network.
In the event of a blackout, those generators would power master control for the network's East and West Coast feeds; the Style network; the data center; transmission lines and information technology. Other operations, such as post-production, have smaller UPS units, giving employees 10 minutes to power down computers and save work in the event of an outage.
But the major back-ups are not enough to power the whole production studio — too many lights. In the event of a blackout during live programming, master control and two spot lights will be fueled "so Steve [Kmetko] and Jules [Asner, hosts of E! News Daily] won't sit there in the dark," he added.
The redundant power will fire up in less than a minute, Carey said. Even those systems are backed up — with a 250-gallon diesel fuel tank. That's enough to power operations for four days, he said. The network has a contract with a fuel vendor to provide refills periodically should natural or unnatural disasters cause long-term outages.
CABLE: WE'LL HELP
Executives say cable systems "will be part of the solution" to the crisis.
Adelphia Communications Corp. has already produced more than 30 hours of programming on the energy crisis and conservation, notes Bill Rosendahl, Adelphia vice president and chairman of the California Cable Television Association.
"Conservation is the number one way to diffuse this problem," Rosendahl said, adding he thinks people will continue to consider cable as a valuable way to enjoy their evenings.
But operators have not had great success attempting to work with government agencies proactively on the crisis. Charter Communications representatives met with Los Angeles County officials to discuss the possibility of using the Emergency Alert System to notify consumers of imminent black-outs. Officials were amenable but the power companies oppose release of the information saying it might benefit the public at large but also would inform the criminal minded of the location of inactive burglar alarms.
Predictably, cable operators are reluctant to be drawn into any discussion about lower subscriber counts resulting from a faltering economy, or dramatic increases in local energy costs.
In Denver, AT&T Broadband insists it did not track how many customers dropped their cable last winter because of electrical and natural gas rates that have doubled over the previous year.
"There's just no way to know," said AT&T spokeswoman Jeannine Hansen.
Apart from routing subscribers calling in to disconnect to its "save" or "rescue" desk — where CSRs try to persuade the customers to downgrade their service rather than have to pay for a new install later — the MSO maintains it's not doing anything special to try to keep financially strapped customers.
It's unlikely, though, that AT&T hasn't lost some customers from among its 500,000 subscribers in the Denver metropolitan area. Not when local statistics indicate that Xcel Energy, the state's largest electrical and natural gas utility, shut off 2,639 customers during a cold snap last February. That was an increase of 10 percent from the previous month, and 13 percent more for the same month a year ago.
But analysts point out that for the last six months cable stocks have held their value, indicating that Wall Street isn't worried that large blocks of customers will jump ship.
"You can make an argument that DBS should be seen in the same light as the cable guys," said Bear Stearns analyst Robert Peck.
But whether or not the economic crunch has impacted the direct broadcast satellite industry depends on who you ask.
Executives at EchoStar Communications are taking their cue from chairman Charlie Ergen, who has been saying that DBS is, if not "recession proof," then at least "recession resistant."
One theory has it that DBS is immune to economic down turns because even at $40 per month satellite programming is still less expensive than a night on the town.
Proof can be found in last year's subscriber numbers, said EchoStar spokesman Mark Lumpkin. Despite a horrendous year on Wall Street, the DBS industry's two dominant operators have added more than 3 million new customers.
"We [EchoStar] added 1.8 million, and DirecTV added 1.5 million," Lumpkin said. He added that the increase spilled over into the first quarter of 2001 — a period when plunging corporate profits and a long list of layoffs dominated the news. EchoStar added 460,000 new customers during the first three months of the year, while DirecTV signed 340,000 new customers.
"People still want to watch television," Lumpkin said.
Lumpkin said EchoStar can shrug off a national economic downturn because it offers 60 digital channels for $21.99 and 150 channels for $39.99, a sharp reduction from cable's average of 50 basic channels for about $50 a month.
Industry analysts have divergent views on the impact of the energy crunch. Whether home-delivered video entertainment will escape tough economic times unscathed, also depends on whom you ask.
Jimmy Schaeffler, chairman of The Carmel Group, a California-based research firm, said consumers caught between heating their homes and keeping their subscription television "are going to churn out."
"Just like with some utilities, there could be a ripple effect for cable and DBS," Schaeffler said. "At a time when electrical rates have gone up two-and-three fold, it may be hard to justify spending $50 or $60 for television. And if push comes to shove, people will drop their subscription television rather than their heat."
Schaeffler admits that the effects on cable and DBS may depend on the severity and length of the economic dip.
"It'll depend on the time frame. There have been recessions in the past when cable has actually benefited," he said.
Traditional, basic-cable services may continue as household staples — "sticky" in the argot of one analyst — but the power crunch could deflate the digital balloon.
"Newer cable services will get hurt the most," said analyst Ryan Jones of The Yankee Group. "Things the most foreign to consumers will fall off first," he said, adding some of those services are also the most "power greedy" in terms of delivery. For instance, video-on-demand is delivered with a distributed-server architecture with a server at every node. With the high cost of energy, and businesses bearing a greater brunt of the hikes than homeowners, operators who are just beginning to deploy the service may end up revising their delivery architecture, or delaying the service until prices settle down, Jones said. He predicted MSOs would take the latter course, delaying the initiation of a service, rather than allowing service delivery to suffer on a potentially vital product.
Jones classed interactive-TV services in the "power hog" category, too.
"Barring a strange change in operations by the utilities, no one can generate a change in strategy but the MSOs," he said. Addressing the acute power crunch and rolling blackouts in California, Jones added, "It's really a double whammy. Companies will asking consumers to pay more for services, which may become unreliable."
Cable won't be cut completely out of the budget, he judged. Jones noted that even during the Great Depression, women paid to get their hair done and people went to the movies to feel good.
"Cable will be a luxury people will latch onto — it's the most sticky. But new products, something people have only been paying for a few months — like digital — that's likely to disappear first."
But Rob Kaimowitz, DBS analyst for S.G. Cowen Securities, believes it's "a stretch" to assume that a population that uses television "as its primary source of entertainment" will drop their cable or DBS subscriptions even in the worst of times.
For one thing, DBS customers are usually more affluent than cable customers, and therefore have more disposable income to spend on home entertainment, he said.
"DBS usually gets a higher end subscriber than cable generally gets," Kaimowitz said.
At Bear Stearns, Peck recently released a report indicating that satellite customers usually come into an electronics store with their minds made up to purchase a satellite system. And in cases where they intend to purchase a high definition television set, a DBS system often becomes an "add on" purchase, as the well-heeled consumers goes for the better picture quality available.
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