So far, the competitive benefits of direct-broadcast satellite's local-into-local offerings have been offset by cable's push to roll out digital programming.
Despite take rates as high as 40 percent among existing customers for DBS' local programming packages, an expected uptick in cable's churn rate has failed to materialize, as consumers sign up for digital cable in record numbers.
Even so, DBS-industry followers said a well-priced package of local broadcast affiliates will ultimately drive up cable's churn rates as consumers find that they no longer need basic lifeline cable subscriptions to get their local channels.
"It's hard to imagine that delivering local channels won't reduce [DBS] churn," said Jimmy Schaeffler, a subscription-TV analyst for The Carmel Group, a Carmel, Calif.-based research outfit.
It also comes down to price, with DBS delivering the major broadcast affiliates in each market for about $5 to $6 per month, compared with an average of $11 for a basic-cable service that delivers the same thing.
"That's an awful lot of digital programming for just $6," Schaeffler said. "Granted, it's only four or five channels now. But when must-carry arrives in January 2002, [DBS operators] are going to have to carry every channel in a given market."
Even so, a 1999 study by Carmel revealed that digital cable poses a serious threat to the DBS industry, in some cases allowing cable operators to price their products below DBS offerings.
"DBS has forced cable to be a better competitor," Schaeffler said. "Operators are pushing to get digital into as many homes as possible because consumers like it and churn out less."
Schaeffler expects cable's churn rate to come down even further under a Federal Communications Commission order that will require consumers to begin buying their set-top boxes effective in July.
"At that point, the consumer will have some skin in the game and will be less likely to churn out," he added.
Meanwhile, EchoStar Communications Corp. is holding down churn by getting the customer to invest in the game.
EchoStar spokesman Mark Lumpkin said the DBS opera-tor has kept its turnover rate down through promotions where consumers receive free satellite dishes and installation in exchange for one-year commitments to Dish Network.
"But if they decide not to subscribe, they're charged the full cost of the equipment and installation," Lumpkin added. "So there's a level of commitment on the customer's part."
Although it's still too early tell exactly how much local-into-local will curb DBS churn, some signs have already surfaced.
DirecTV Inc., for example, added a record 225,000 net new customers in the first month after passage of the Satellite Home Viewer Improvement Act-the landmark legislation that allows DBS operators to deliver local broadcast channels in each of their markets.
At EchoStar, meanwhile, 160,000 new subscribers were added in the month after the company began offering local programming in 13 markets, compared with 137,000 the month before.
Sean Badding, vice president of business development for Carmel, said take rates for DirecTV's local programming have exceeded expectations in the 23 markets were it was initially offered, averaging 40 percent among existing customers and 50 percent among new subscribers.
"Local programming is a definite plus for DBS," he said. "Before, customers knew they couldn't get local channels. Now they can. If anything, it's going to satisfy and retain the existing customer base for DirecTV and EchoStar."
A study by Carmel revealed that in 1998, churn for DirecTV averaged 1 percent per month, or 12 percent on an annualized basis, while EchoStar's customer-turnover rate averaged 1.25 percent per month, or between 14 percent and 15 percent for the year. PrimeStar Inc.-which has since been acquired by DirecTV-stood at 2.4 percent per month, translating to an annual churn rate of 29 percent.
Cable, on the other hand, endured a churn rate of 2.1 percent in 1998, or 25 percent annualized, compared with a monthly rate of 2 percent, or 24 percent annualized, in 1997.
However, the study found that by the first quarter of 1999, cable's churn rate was back down to 2 percent per month, or 24 percent per year. Churn for DirecTV, meanwhile, was up to 1.25 percent, or 24 percent, while EchoStar was down to 1.1 percent, or 13 percent.
Cable executives attributed a push to roll out digital programming as the primary reason behind slowing an industry churn rate that typically exceeds 20 percent per year.
According to the National Cable Television Association, operators added 1.1 million new digital customers during the first quarter of 2000 alone, pushing the industry's total to more than 6 million digital subscribers.
At AT & T Broadband, the result has been an 18 percent penetration rate, spread across a subscriber base of 11.3 million customers, and a reduction in total churn from a high of 9 percent per month to about 5 percent, vice president of marketing Doug Seserman said.
Just as important, he added, 40 percent of AT & T Broadband's new customers are signing up for digital cable.
"People talk about breaking the 50 percent-penetration barrier," he said. "Well, our business is trending that way. And another important piece is that we've cut premium downgrades almost in half."
Sometimes, however, the numbers don't tell the full story.
Industry analyst Rob Kaim-owitz said local-into-local will drive up cable's churn rate by siphoning off DBS customers who previously needed basic cable in order to get their local news.
For example, while DirecTV was posting up to 50 percent take rates among existing customers three weeks after it launched local-into-local, AT & T Broadband was experiencing its first month of negative subscriber growth. "Why do you suppose that was?" Kaimowitz asked.
Oddly enough, some DBS executives dismissed the impact of local-into-local on their business, arguing that the vast majority of churn is tied to "affordability," or, simply, people who can't pay their bills. Therefore, DBS operators are concentrating on developing "retention" programs designed to hold down churn.
At DirecTV, for example, a "mover's program" allows customers to leave their dishes behind when moving from one location to another. Once at their new locations, DirecTV will send out technicians to install new dishes.
"We're trying to make it easier to keep DirecTV," vice president for business development and strategic planning Terry Ferguson said.
Another way of keeping customers is to allow cash-strapped subscribers to disconnect during financially tough months, then to reconnect the following month with no penalty.
Still another is through customer-service representatives who are schooled in putting together programming packages especially tailored to customers' pocketbooks.
"We want to keep the customer satisfied," Ferguson said. "If they can only afford $20 per month, we still want to keep them."
Meanwhile, during a recent analysts' call, executives with Hughes Electronics Corp., DirecTV's parent, conceded that churn at the DBS unit stood at 1.7 percent in the first quarter, up from 1.5 percent for the previous three months. They attributed the increase to customer-service problems and stricter credit practices.
They predicted, however, that subscriber turnover would slip back to 1.5 percent by midyear now that almost three times the number of CSRs have been added to the payroll.
