America Online Inc. is pumping cash and marketing clout
into Hughes Electronics Corp.'s satellite-TV and high-speed-data offerings,
committing $1.5 billion to DirecTV Inc. and DirecPC.
The companies had already announced plans to jointly bring
the interactive-TV service called "AOL TV" to market next year through new
DirecTV set-top boxes.
AOL's cash will be used to accelerate subscriber
growth for both DirecTV and AOL, the companies said last week. Up to $500 million is
earmarked to market DirecTV, and $150 million of that will go toward pitching the
direct-broadcast satellite service directly to AOL subscribers.
"DirecTV is at an inflection point -- where AOL was
just a few years ago," AOL chairman Steve Case told reporters in a conference call.
In the past five years, AOL has grown its subscriber base
from several-hundred-thousand to more than 16 million, including CompuServe Interactive
Services Inc. customers, Case said.
DirecTV, which launched to consumers five years ago this
month, has 7 million customers, including 2 million former PrimeStar Inc. customers still
using medium-power satellite dishes.
"When AOL hit 10 million, it boomed," The Carmel
Group chairman Jimmy Schaeffler said. "Now, they're doing the same thing for
DBS."
DBS analyst Steve Blum, president of Tellus Venture
Associates, called the deal mutually beneficial to both market-leading companies.
"Anybody who logs onto AOL is bombarded with marketing
messages," he said. "That's a feature of the AOL service. It's not
always a pleasant feature, but it is a feature."
DirecTV president Eddy Hartenstein said AOL would not gain
any management role or board position in Hughes or DirecTV through the deal, but he does
expect marketing executives from AOL and DirecTV to be in daily contact. "AOL is not
so much a technology company as a marketing company," he added.
In addition to AOL TV, the companies will market a
high-speed Internet service for personal computers, "AOL-Plus via DirecPC."
Hughes Network Systems already distributes DirecPC through retail; AOL will also promote
the broadband service online.
More than $500 million will go toward promoting AOL-Plus.
Another $100 million goes to the HNS "DirecDuo" product, which combines feeds
for the DirecPC and DirecTV services through a single dish.
A portion of the marketing dollars for AOL TV and AOL-Plus
may go to consumer hardware subsidies, Hughes executives suggested.
Hartenstein said AOL-Plus could be available by the end of
the year. "It's just a matter of getting the marketing message up and
going," he added.
According to Hartenstein, the service will be priced to
compete with alternatives, such as cable modems. A spokesman for AOL said AOL-Plus would
be $40 per month for satellite and DSL (telephone digital-subscriber-line) customers.
After several years on the market, DirecPC has signed up
only 100,000 subscribers worldwide and just 40,000 in the United States. But Hughes
chairman Michael Smith predicted that the company would count 1.5 million DirecPC
subscribers over the next three years, after a new marketing push.
Some analysts were skeptical. "Time has passed
[DirecPC] by," Blum said, pointing to the faster speeds of cable modems and DSL
technology. "Today, I don't think all of the marketing in the world can help
it."
Blum went so far as to predict that DirecPC would suffer
considerable churn after early adopters migrate to cable modems or DSL.
Case didn't deny that other broadband technologies
were attractive to consumers. In fact, he told reporters he'd like AOL to have a
foothold in all of them -- cable, DSL, satellite and wireless -- creating "a
broadband tapestry."
Case has said in the past that he's open to
negotiating mutually beneficial deals with cable operators. But at the same time, he has
angered operators by aggressively lobbying lawmakers and regulators to force cable to make
broadband capacity available to AOL and other providers at wholesale rates.
Goldman, Sachs & Co. analyst Lou Kerner pointed out
that cable operators are reluctant to sign with AOL because of such issues as customer
control, what screens the customers see when they first log on and how revenues are split.
Satellite platforms such as DirecPC have some drawbacks.
Case conceded that DirecPC was only broadband one-way, with a narrowband return path
through telephone lines. But by 2003, Hughes will add two-way broadband capacity for
AOL-Plus through its planned "Spaceway" Ka-band satellite service.
"Nationwide, less than one-third of consumers have any
broadband option available to them," Case added. Satellite systems will be especially
important to consumers in rural areas, who might never have wired broadband alternatives.
If DirecPC is truly trying to gain a foothold in the rural
markets, then Hughes "had better start making nice with the NRTC [National Rural
Telecommunications Cooperative]," Blum said.
The NRTC markets DirecTV programming to certain rural
territories, and it has signed more than 1 million DBS customers over the past five years.
To date, the NRTC is not involved in selling DirecPC,
Hartenstein said, although that's something that could be negotiated in the future.
Several weeks ago, the NRTC sued DirecTV for breach of
contract. The matter is still before the court, but DirecTV won the first round when a
federal judge in California rejected bids for a preliminary injunction and a temporary
restraining order that would have kept DirecTV from selling premium-movie services such as
Home Box Office in NRTC territories.
DirecTV and the NRTC have had preliminary discussions to
begin renegotiations, Hartenstein said.
Satellite-data services also have a harder time adding
bandwidth to accommodate increased demand. Hartenstein said Hughes plans to launch more
satellites to meet rising demand for DirecPC.
Analysts predicted that the AOL TV component of the
strategic alliance could prove more important than AOL-Plus. Blum said AOL was good at
creating content, which DirecTV needs to develop interactive television.
