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DirecTV HD DVR Delayed Again

DirecTV once again delayed the rollout of its new HD digital-video recorders, which could make impatient subscribers switch over to competitors EchoStar Communications or cable, a Wall Street analyst said Monday.

In a report, Sanford C. Bernstein analyst Craig Moffett wrote that DirecTV’s churn rates could rise because of yet another postponement of the deployment of its state-of-the-art dual-tuner HD DVRs.

“There is obviously a limit to how long customers — who, after all, have just spent large amounts of money on a flat-panel HDTV — will be willing to wait for an upgrade from DirecTV before they simply switch to a competitor instead,” Moffett wrote. “EchoStar and cable operators could benefit.”

Moffett cited a letter that DirecTV is sending to customers on a wait list for the HD DVRs. The direct-broadcast satellite provider said the new HD DVRs — originally expected early this year, then pushed back until spring — are now set to be available this fall. He blamed the delay on a lack of product inventory.

“We believe shortages of the combination HD DVR unit have contributed to DirecTV falling behind cable competitors in HD readiness,” Moffett wrote. “HDTV penetration of digital subscribers among cable operators appears significantly higher than at DirecTV.”

But in what he calls “the bizarre calculus that is the DBS industry,” Moffett said the glitches in getting the new DVRs to subscribers in some ways will help DirecTV’s bottom line in the short term, since the upgrade involves “significant” costs to the company.

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“More delays for the HR20 should translate into better near-term financial results, since upgrades are a key driver of retention-marketing expense [and capital expenditures such as upgrade equipment are now capitalized under their new leasing plan],” Moffett wrote. “Lower retention marketing means higher EBITDA [earnings before interest, taxes, debt and amortization] and higher earnings … But we’re skeptical that investors will continue to give DirecTV a free pass, however, as the future upgrade requirement is clearly growing.”

The analyst also made reference to a plan announced last week by News Corp.’s British Sky Broadcasting to provide free broadband service to its subscribers in Great Britain. News Corp. owns 38% of DirecTV, which doesn’t have a broadband offering yet.

“News Corp.’s willingness to slash cash flows at BSkyB would appear to raise the risk of an unwelcome surprise in capital spending related to plans for a terrestrial broadband network at DirecTV, as well,” Moffett wrote. “Even if the business were to be built off-balance-sheet, subscriber-acquisition costs associated with the broadband venture could directly and significantly impact DirecTV’s cash flows.

A Federal Communications Commission auction for the so-called AWS (advanced wireless services) spectrum begins in a several weeks, he noted.

“We’re not far off the timetable we established earlier this year,” DirecTV director of public relations Robert Mercer said. “We are completing some additional testing on the software to ensure that the box is operating smoothly when we begin shipping to consumers nationwide in the September/October time frame. The receiver’s performance thus far has been exceptional. and we’re looking forward to the launch.”
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