2230 East Imperial Highway
DIRECTV is continuing to redefine the world of television entertainme nt. Advances in technology are enabling our viewers to have greater c ontrol over their viewing and experience new services on their televi sion, such as digital video recording (DVR), high-definition TV, expa nded multicultural programming, interactive programming and more.
DIRECTV, Inc. is the world's largest satellite television provider, s erving nearly 15 million subscribers in the United States and 1.5 mil lion subscribers in Latin America. DIRECTV is owned by The DIRECTV Gr oup, Inc., a publicly traded company that is 34-percent owned by News Corp. subsidiary, Fox Entertainment Group, Inc.
Residential satellite television got its start in the early 1980s, bu t it would be years until the business developed into a legitimate in dustry. Early efforts failed largely because of poor signal quality a nd insufficient programming, which generally consisted of sporting ev ents. Sports as a mainstay of programming was not at fault--the marke t appeal of sporting events represented an all-powerful force in the broadcast industry--but the depth and diversity of the programming of fered by satellite broadcasters paled against the content provided by cable operators. One of satellite broadcasting's advantages was that it could reach markets and communities cable lines had not reached, which freed satellite operators from competing head to head with cabl e in some locations. However, catering to the sliver of potential cus tomers in hard to reach areas would never be enough to cover operatin g costs. To develop into genuine competitors within the broadcast mar ket, satellite operators had to steal business away from cable compan ies, something their meager programming offerings and scratchy pictur e quality could not do in the early 1980s. Consumers, by and large, o pted for cable boxes on top of their television sets rather than for high-priced, massive satellite dishes in their backyards. The era of residential satellite service, it became apparent, had arrived premat urely. Hughes Electronics Corporation, a unit of General Motors, real ized the fundamental flaws of direct broadcast satellite (DBS) servic e when it first began to develop DBS plans in 1985. The problem of pr ogramming could be overcome by forging distribution deals, but the in herent problems of signal clarity and capacity were inescapable. Hugh es's position, and with it the market feasibility of DBS service, was transformed by the development of digital compression technology. Di gital compression increased the broadcast capacity of satellites by a s much as eightfold. Perhaps more important, the new technology produ ced a much sharper image than earlier satellite broadcasting efforts, sharper, satellite operators could claim, than the picture received by cable customers. The ramifications were profound, suddenly giving DBS operators a chance to profit in a multibillion-dollar market. Hug hes, as the largest satellite company in the world, wanted to dominat e the market potential created by digital compression technology. Beg inning in 1990, Hughes started forming DIRECTV to fulfill its objecti ve, allocating $750 million to fund the company's start-up.
To steward Hughes's entry into DBS, the company picked Eddy W. Harten stein, a senior project engineer for scientific, commercial, and clas sified satellite programs for Hughes Aircraft Co. Hartenstein, as the orchestrator of DIRECTV's formation and development, championed the cause of satellite television, acting as the industry's vocal and inf luential promoter. His first priority as the 1990s got underway was t o forge partnerships with other companies, alliances that would give DIRECTV the hardware, software, and the programming to become operati onal. During the company's formative years, Hartenstein allied DIRECT V with high-profile concerns such as Sony Corporation and Digital Equ ipment Corporation. Thomson Consumer Electronics (a subsidiary of Tho mson S.A.), for instance, entered into an agreement with DIRECTV to m anufacture the satellite dishes that would eventually be marketed to consumers. Aside from such major tasks as perfecting the home receivi ng equipment, getting the programming in place, and, of course, launc hing a satellite, there were equally important projects such as devel oping the software systems to control programming, scheduling, billin g, and other functions. "This is probably the single most complex tel evision start-up in history," Hartenstein remarked in a March 28, 199 4 interview with Broadcasting & Cable. "There is an incred ible amount of detail work that we need to do and make sure is workin g correctly before we turn this on-line and generate revenues," he ex plained.
As Hartenstein set out, only the problem of picture quality had been resolved from satellite television's previous flawed existence. The p roblems of programming and hardware costs incurred by the customer re mained to be solved, representing two of the most important factors t hat would determine DIRECTV's fate. The company needed programming th at would justify in the minds of consumers the expense of a $700 to $900 satellite dish, and it needed programming capable of luri ng customers away from cable television providers. The cost of dishes , according to Hartenstein, would fall as more and more people became DIRECTV subscribers, which left obtaining programming as the company 's primary objective. Good programming would attract customers, which would drive down the cost of dishes, and, in turn, attract even more customers.
Toward this end, Hartenstein scrambled to secure the programming that would serve as the foundation for DIRECTV's success. In 1993, the co mpany signed distribution agreements with several leading entertainme nt programmers. The agreements gave DIRECTV the right to distribute p rogramming services owned by The Sci-Fi Channel, TNN: The Nashville N etwork, CMT: Country Music Television, The Family Channel, USA Networ k, and Turner Broadcasting. The pursuit of distribution agreements di d not stop there, nor would they ever. The company was actively negot iating with other cable programmers, professional and collegiate spor ts leagues, and movie studios, part of its constant effort to offer s atellite viewers more content than cable operators.
First Satellite Launch: 1993
As the deal-making waged on and the operational aspects of DIRECTV's infrastructure gradually came together, a pivotal moment in the compa ny's existence arrived before the end of the year. In December 1993, the company's first satellite was launched, ascending then resting 23 ,000 miles above the earth. Approximately five times stronger than tr aditional satellites and capable of transmitting up to eight times as many video signals, the company's first Hughes-built "bird" was soon ready to beam programming and information directly to a DIRECTV home receiving unit, its high-power capabilities requiring a dish, or ant enna, measuring only 18 inches. All that remained for the company to become a revenue-generating enterprise was the completion of the 13 m ajor software systems on Earth that controlled DIRECTV's programming, scheduling, and billing.
The date for DIRECTV's DBS service to begin was set for May 1, 1994. In preparation for the momentous event, agreements were reached with 2,000 dealers and 1,000 electronics stores, including Sears and Circu it City, to sell the equipment required for DIRECTV service. Agreemen ts were in place for another 2,000 outlets, including Ward's and Best Buy stores, to sell the service beginning in the fall of 1994. By th e end of 1995, Hartenstein wanted to have 8,000 retailers selling the company's pizza-sized satellite dishes. Hartenstein had other target numbers he was trying to reach as the DBS-1 satellite sat positioned in geosynchronous orbit, none more important than the projected brea k-even point for his pioneering company. According to the company's e stimates, three million subscribers paying $30 in monthly subscri ption fees would push DIRECTV past the point of operating at a loss a nd usher in profitability. Hartenstein hoped to reach this threshold by late 1996 or early 1997. By 2000, Hartenstein projected there woul d be ten million DIRECTV subscribers.
Initially, DIRECTV's DBS service was sold in five markets. Expansion into seven states was completed by June 1994, setting up the coast-to -coast launch of DBS service in the fall of 1994. By the time the com pany rolled out national service, its broadcast capabilities had been bolstered considerably. The DBS-2 satellite was launched in early Au gust 1994, increasing the company's broadcasting capacity to 40 chann els of cable programming and 50 pay-per-view channels. A third satell ite was launched in mid-1995, making DIRECTV's basic lineup roughly f our times the size of cable's offering.
The sale of DIRECTV dishes was brisk at first, aided by the launch of DBS-1 just before the holiday season. The company boasted approximat ely 350,000 subscribers by the end of 1994, exceeding its expectation s, and was gaining new subscribers at a rate of 3,000 per day. It was a promising start, but there was still much to accomplish before Har tenstein could claim a lasting hold on the broadcast market.
The obvious need was to gain as many new subscribers as possible to r each the point where the company was profitable. How to gain new subs cribers proved to be a murkier question, posing a problem with no eas y solution and sparking debate among industry analysts and satellite broadcasters alike. The dilemma centered on the long-term value of of fering potential customers subsidies on the hardware required to rece ive DBS service. By reducing the cost of dishes, so the thinking went , more people would be willing to subscribe to satellite service. The greater the subsidies, however, the greater the operating losses bec ame, as the difference between manufacturing costs and what the custo mer paid for the hardware widened. Considering that DIRECTV was backe d by Hughes and General Motors, the company could absorb financial lo sses that other, less-endowed companies could not sustain, but the us e of subsidies had another drawback, one perceived to be more menacin g to a company's fortunes than escalating operating losses. Consensus maintained that if subscribers paid less up-front costs, they were l ikelier to later cancel their subscriptions, or "churn out," because they had made less of a financial investment in the service. Gaining new subscribers in this respect represented artificial growth, causin g greater operating losses and a higher churn-out rate, which could r ender a DBS service provider financially moribund.
The catch-22 of subsidizing subscriber growth presented Hartenstein w ith a difficult challenge as he set out to increase DIRECTV's subscri ber base. Nevertheless, he could take comfort in DIRECTV's stalwart i ndustry position. Roughly a year after launching its service the comp any ranked as the largest competitor in the DBS television market, fa r ahead of its closest competitor, Primestar. By June 1995, DIRECTV h ad more than 500,000 subscribers scattered across the United States, with projections calling for the company to slip past the one-million th-subscriber mark by the end of 1995. In early 1996, the company gai ned its first major partner when AT&T Corp. paid $137.5 milli on for a 2.5 percent stake in the company, kicking off a banner year in which one million new subscribers signed up for DIRECTV. By the en d of 1996, revenues reached $621 million, but profitability still eluded the company.
Chasing Growth in the Late 1990s
DIRECTV performed remarkably well in its fourth year of operation, bu t the celebratory mood that should have pervaded company headquarters in El Segundo, California, was tempered by an anticlimactic air. Dur ing the year, the company signed up its three millionth subscriber, r eaching the point of projected profitability, but 1997 ended with a l oss. In other respects, the company was demonstrating enviable streng th. DIRECTV had nearly one million more subscribers than its closest competitor, it controlled nearly 50 percent of the U.S. DBS market, a nd the company's revenues had more than doubled in 1997, reaching  6;1.28 billion. The cost of luring new subscribers, however, meant je opardizing profitability. In an effort to stimulate demand, the compa ny lowered the price of its dish and set-top box to $199, further distancing itself from the threshold of profitability. Although DIRE CTV was recording robust growth, some analysts wondered whether the c ompany would accumulate too much in operating losses while it hotly p ursued new subscribers.
As the company entered 1998, the word from Hughes was that the compan y would sacrifice profits to gain new subscribers. One of the major f actors prompting the decision was the expected implementation of digi tal compression technology by the cable industry. In early 1998, the cable industry was beginning to embrace the technology, which as it h ad for DBS operators, would increase capacity and picture quality. DI RECTV believed it needed to act fast before an important marketing ad vantage began to lose its strength. In a March 1998 interview with th e Los Angeles Business Journal, Mike Smith, Hughes's chairman and chief executive officer, explained: "We have decided to postpone profitability in our DIRECTV business another year because we think i t's better to lower our prices and add more subscribers while cable i s still vulnerable. They haven't yet gone to digital ... we are tryin g to take advantage of this window that we now have."
The actions of DIRECTV during the last years of the 1990s demonstrate d its determination to sign up new subscribers. In March 1999, the co mpany began a national retail and marketing promotion to new subscrib ers that included free installation and three months of free service. The offering helped DIRECTV sign up 120,000 new subscribers in March alone, leading to a record first quarter of 1999 during which more t han 300,000 subscribers signed up. A bigger boost to the company's su bscriber rolls arrived via acquisition. In January 1999, Hughes annou nced the acquisition of DIRECTV's major partner, United States Satell ite Broadcasting, and DIRECTV's closest competitor, Primestar, as wel l as the purchase of two high-power satellites. After the deals were completed, DIRECTV's programming selection exceeded 200 channels and its subscriber count swelled to more than seven million.
By August 2000, DIRECTV had more than 8.5 million subscribers, traili ng only cable behemoths AT&T Broadband and Time Warner in the num ber of multichannel video subscribers. According to company projectio ns, DIRECTV expected to reach ten million subscribers by the end of t he year. Although the company was close to turning a profit, some ana lysts were worried by slackening new subscriber growth, while other a nalysts offered a more optimistic perspective, pointing to potential growth that could witness DIRECTV catapulting past AT&T Broadband and Time Warner by 2005.
A New Owner in the 21st Century
The first half of the new decade saw dramatic changes in the U.S. pay -television market, as competition intensified, new technologies emer ged, and new management teams battled against one another for suprema cy. The period was most noteworthy for the massive deals completed th at put new owners in charge of the country's premier cable and satell ite companies. On the cable side, AT&T Broadband bowed out after Comcast Corporation acquired its cable and Internet operations for a staggering $54 billion in late 2002, giving DIRECTV's most formid able foe a new name. On the satellite side, DIRECTV found itself to b e the object of someone else's fancy as well after General Motors put Hughes Electronics on the auction block in 2000. The announcement at tracted the attention of media mogul Rupert Murdoch, who had been try ing to establish a presence in the U.S. DBS market since 1983. Murdoc h, through his company, News Corp., owned or controlled media busines ses that generated $30 billion in annual revenue, presiding over an empire that published 175 newspapers, delivered television program ming in five continents, and, in the United States, owned 35 televisi on stations, the Twentieth Century Fox studio, and the Fox Network. M urdoch desperately wanted DIRECTV, but the pursuit took persistence, resulting in a three-year chase that underscored the value of DIRECTV 's hold on the DBS market.
Murdoch and General Motors struggled to come to terms over the fate o f DIRECTV. For 18 months, the parties negotiated the particulars of t he deal, but they were unable to agree on a price. At this point, Ech oStar Communications Corp., led by Charles Ergen, entered a bid for H ughes Electronics, exacerbating Murdoch's frustration. In 1997, Ergen and Murdoch had attempted to join forces in the satellite business, one of a handful of attempts by Murdoch to secure a foothold in the U .S. DBS market, but the partnership flared, according to reports, int o a bitter rivalry. Ergen surprised industry onlookers by raising  6;26 billion, enough to gain General Motors' nod of approval in Octob er 2001, but Murdoch refused to give up his fight. He marshaled his f orces to mount a challenge against the proposed transaction, sending lobbyists to the U.S. Congress and to the Federal Communications Comm ission to undermine Ergen's attempt to acquire DIRECTV. Murdoch preva iled, achieving his objective in December 2002 when the U.S. Justice Department ruled that the combination of the two satellite companies would be anti-competitive. With the interdictive assault by Ergen bru shed aside, Murdoch renewed talks with General Motors, reaching an ag reement with the car maker to acquire a 34 percent controlling stake in Hughes Electronics in April 2003. After review by regulatory autho rities, the deal closed in December 2003, giving Murdoch control of a U.S. satellite company after 20 years of failed attempts.
In the aftermath of the pivotal deal, DIRECTV entered a new era of ex istence, one supported by the massive resources at Murdoch's disposal . The name of the company's parent company was changed from Hughes El ectronics Corp. to The DIRECTV Group, Inc. Ownership of The DIRECTV G roup, and by extension, DIRECTV, Inc., was passed from News Corp. to one of its subsidiaries, Fox Entertainment Group, Inc. Mitchell Stern , the chief executive officer of the Fox TV Stations Group, was assig ned to head DIRECTV's operations, working under Chase Carey, who was appointed chief executive officer of The DIRECTV Group. Carey ordered sweeping changes for the operations he inherited, shedding nearly ev ery asset that was not related to satellite broadcasting. He sold DIR ECTV's 80 percent interest in satellite-launch service PanAmSat for & #36;2.6 billion, divested the company's set-top-box manufacturing div ision, and cut its holdings in XM Satellite Radio. After the streamli ning efforts, which included reducing DIRECTV's headquarters payroll by roughly 50 percent, Carey spent $1.4 billion to acquire two ru ral satellite companies, Pegasus Communications and the National Rura l Telecommunications Cooperative.
Under Murdoch's control, DIRECTV's subscriber rolls swelled at an acc elerated rate, but it continued to suffer from a high churn rate and a lack of profits. The company's strategy of adding new subscribers a t the expense of short-term profitability, essentially subsidizing it s expansion, continued under Murdoch's rule, aping the strategy he em ployed with the British Sky Broadcasting Group (BSkyB). Once Murdoch gained a controlling interest in BSkyB, he invested heavily in techno logy as a lure to attract customers, at one point losing $1 billi on to provide viewers with digital boxes. He was expected to do the s ame with DIRECTV by wresting subscribers away from cable with technol ogical offerings. In many respects, the strategy underpinning DIRECTV before and after News Corp. took control was the same, but with the enormous financial resources and renowned managerial skills of Murdoc h supporting and guiding DIRECTV's fortunes, the company's hopes for a successful future were brighter than at any point in its past.
Principal Subsidiaries: DIRECTV Holdings, LLC; DIRECTV Financi ng Co., Inc.; DIRECTV Enterprises, LLC; DIRECTV Customers Services, I nc.; DIRECTV Programming Holdings I, Inc.; DIRECTV Programming Holdin gs II, Inc.; DIRECTV Merchandising, Inc.; DIRECTV Operations, LLC; DI RECTV International Inc.; DIRECTV Latin America Holdings, Inc.; DIREC TV Mexico Holdings, LLC; DIRECTV Trinidad Limited (Trinidad/Tobago); DIRECTV Latin America, LLC.
Principal Competitors: Comcast Corporation; EchoStar Communica tions Corporation; Time Warner Cable Inc.