AT&T and DirecTV announced an agreement where AT&T will resell DirecTV services as a part of their “AT&T Advanced TV” video portfolio. The agreement will begin after January 31, 2009, when AT&T’s current agreement with DISH Networks expires. It’s a big, although expected, blow to DISH Networks, who had great success with leveraging their AT&T partnership for subscriber growth. Observers from afar could conclude that AT&T stopped aggressively marketing their DISH bundle in favor of U-verse long ago, which certainly contributed to DISH’s slowing subscriber growth, culminating with an actual decline in subscriber counts in 2Q08.

"Our focus is on providing customers with a better TV experience than cable," said Jeff Weber, AT&T vice president-Video and Entertainment in a company statement. "AT&T | DIRECTV complements our premier AT&T U-verse TV service and gives customers another great choice for state-of-the-art, 100 percent digital programming." DirecTV now has a virtual coup with “bell company” telco partnerships, including agreements with Verizon, Qwest, and AT&T. DISH has current resale agreements with large independents, including EMBARQ, Windstream, and CenturyTel. Now the real question – how long before AT&T buys DirecTV?

DISH Networks has made much noise with HD recently, culminating with their launch of an all HD package, branded TurboHD. Now comes word that they are the “first” pay-TV provider to go all MPEG-4 with standard and high definition programming. “New customers in 21 designated markets in the eastern half of the U.S. who sign up for any DISH Network HD package will be the first in the nation to receive the industry's most advanced delivery system on all televisions connected to DISH Network service,” said DISH in a company statement. The moves come on the heels of a couple dismal quarters for DISH, including 2Q08, where they lost subscribers for the first time in history.

So will these moves be enough? Maybe. You have to give DISH credit. They faced a major setback in HD earlier this year when they lost a satellite shortly after launch. They’ve managed to get past that hurdle. The MPEG-4 announcement makes for a great press release, but I’m not sure how much of an impact it will have on everyday consumers and their choice in pay-TV service. The TurboHD offering has a better chance of moving the needle for them. In addition, they announced new value programming options of $10/month and $20/month, tied to the DTV transition, echoing similar DTV exploitation strategies being pursued by cable competitors. DISH is feeling competitive heat from all angles, including telcoTV providers. It appears as if they are making some real efforts to meet those competitors head on, and reverse the trend of the past two quarters. Will it work?

Sorry DISH, this isn’t a reality show. DISH revealed their first ever quarterly loss of subscribers, losing 25K subscribers in 2Q08. Seems like the competitive heat continues to rise for them. They’re losing subscribers to the competition, but also to an anemic housing sector, where slower housing starts and soaring foreclosure rates are creating a perfect storm which negatively impacts subscriber growth. It will be interesting to compare these results to DirecTV’s, since DISH cites HD competition as a reason for their decline as well. It makes their HD announcement from earlier this week all that more important. DISH will have its challenges to reverse the trend. It’s particularly scary for them because they are seen as a “value” play against their competitors. If these hard economic times don’t push subscribers to DISH over their more expensive competitors, what will?

AT&T notified DISH Networks that it will sever their existing resale arrangement at the end of this year. AT&T has been reselling DISH’s video services since 2003 and expanded the relationship further after their Bellsouth acquisition. It’s widely believed that through this move, AT&T is forcing DISH’s hand into a bidding war with DirecTV for a long term resale arrangement with them. AT&T will need a DBS resale partner, just like every major telco in the U.S. currently has. Despite all the hype surrounding U-Verse, AT&T will need a DBS partner to field a competitive triple play bundle for years to come. Even after the current billions of dollars that are committed to U-Verse have been spent, it will still only reach a large minority of AT&T customers. The mid to long term strategy for AT&T and other telcos is to use DBS to fill the gaps. Of course, AT&T may have something else up its sleeve as well – a possible acquisition of DirecTV. Is this DISH development a pre-emptive merger move, with DirecTV being the acquisition prize?

Chase Carey, CEO of DirecTV, says that they've felt the competitive impact (certainly not as much as DISH Networks) from telcos and their video offerings. But he's not too worried, because those gains, by his estimation, are unsustainable. Carey asserts that the discounts and promotions offered by telcos to grab video market share can't be continued, and that consumers are getting savvier about triple play bundles and the promotional pricing tied to them. There's certainly some truth to that, but its funny hearing it from a DBS industry that historically had very high (maybe the highest) subscriber acquisition costs when they were in the thick of taking market share from the cable industry. Maybe it's too early to tell, but it appears that strategy worked for them, since they now collectively have roughly one third of the video subscription market. Why then, can't telcoTV players follow suit? Carey offered his comments at a Lehman Brothers Wireless and Wireline Conference in New York City on Thursday. Carey said he's quite comfortable with DirecTV's position relative to its competitors. He says DirecTV is faring quite well and their successful HD market lead is paying dividends.

An important milestone was reached for the first time last quarter. Telcos like AT&T and Verizon collectively added more video subscribers than DBS providers. AT&T and Verizon collectively added 411K new video subs, while DirecTV and DISH added only 310K. DBS has historically been the leader in new net video subscriber additions for the past few years, mostly at the expense of cable companies. Expect that trend to change. TelcoTV providers will probably take that quarterly “growth crown” for the next few years, as they ramp up their triple and quad play offerings. In fact, as Investors Business Daily accurately points out, telcos haven’t even begun rolling out in the largest cities yet. As they do, their growth rates should accelerate. Verizon’s recent news about offering FiOS in New York City, should it actually materialize, will be a good indicator on the growth impact caused by extending their reach into larger cities.

Interestingly enough, DBS providers are taking a double hit from the telco’s video progress. A good portion of the new telco video adds are coming at the expense of DBS, as evidenced by DISH’s poor first quarter for net new adds. In addition, telcos are slowing down there DBS resale efforts (AT&T – DISH and Verizon – DirecTV), as they ramp up their own video efforts. Those telco resale arrangements have been a good source of growth for DBS providers. As their telco partners get distracted with their own video launches, DirecTV and DISH will have to work much harder to replace those lost resale additions. Part of DirecTV’s strategy is to try to attract higher value subscribers with advanced feature portfolios and more robust HD content packages, hoping their higher ARPU will help replace revenues lost by smaller gains in net new subscriber additions.

AT&T has announced they are expanding their DISH Networks resale relationship to their former Bellsouth territory. Bellsouth had a resale arrangement with DirecTV, and AT&T let it expire after their acquisition of Bellsouth. AT&T has slightly over 2 million DBS subscribers from both their DirecTV and DISH resale arrangements. AT&T has also said they will reevaluate their entire DBS resale strategy in 2009.

RCN, a Herndon, Virginia based triple play provider, announced a dramatic increase in its video on demand portfolio, “almost doubling” its content library. RCN is also upgrading its VOD technology platform to allow new VOD choices, including HD VOD, an intuitive on-demand portal and “virtual on-demand.” The upgraded platform will be available to RCN’s digital customers in Boston, Chicago, New York, Penn. and D.C. by June.

RCN is following the lead of other multi-channel video operators who see VOD as a competitive necessity, and in some cases, an advantage. VOD is an “Achilles heel” for DBS providers, because their satellite technology prevents a two way interactive session, which is required for VOD. Cable and IPTV providers are leveraging VOD for this advantage and increasingly putting emphasis on high definition VOD as a counter to satellite’s linear channel HD advantage.

Both DirecTV and DISH ran into major HD setbacks this week. A new satellite that DISH planned to use for HD channels encountered a problem after its launch and its future is uncertain. The SES AMERICOM AMC 14 satellite was unable to get into its proper orbit after launch. DISH was planning on leasing the satellite for HD capacity, specifically for local HD channels. In another unrelated setback, DirecTV’s latest satellite launch has been delayed. They had scheduled a launch for Monday of this week, but it is delayed indefinitely. DirecTV plans on using this latest satellite for HD capacity as well, hoping it will help them achieve their promised 150 HD channel line up.

These delays put a cloud over both DirecTV and DISH, considering HD is seen as a competitive advantage for DBS over cable and IPTV. Most likely the setbacks are temporary ones. Perhaps they will give competitors some time to play catch up. The news looks worse for DISH. If the AMC 14 issue can’t be positively resolved, DISH will face major setbacks with its HD strategy. Even if they manage to get the satellite into its proper orbit, it will burn precious on-board fuel, significantly reducing its service life. Whatever the outcome, DISH’s HD strategy will be impacted, and not positively.

Michigan passed a law, Public Law 480, about a year ago that lowered some barriers to market entry for incumbent cable company competitors. The goal was to encourage competition on the local level for cable TV services by allowing basically a statewide franchise. Multichannel News reports that a recent study reveals very little competition has actually arrived. Only 110 communities out of a possible 2,000 now have a legitimate competitor. Commenting on the study’s results, Michigan’s attorney general Jon Kreucher put a new twist on cable’s triple play accomplishments. "Unfortunately, cable companies scored the triple-play last year: Very poor levels of new competition, exceptionally bad levels of customer service, and prices that often increased ten times faster than the national consumer price index for other forms of recreation," said Kreucher. Needless to say, Michigan authorities are disappointed in the lack of competitive progress.

The Michigan example illustrates the reality of the competitive landscape. Beyond major metro markets, competition takes time to develop. As Gary Kim points out in his IP Carrier blog post, competition is expensive and time consuming. The cable overbuilding business is not for the faint at heart. Outside of the urban and suburban markets targeted by AT&T, Verizon, and the few remaining cable overbuilders, your left with the independent telco sector to fuel competitive build outs. While independents have been quite active with triple play competitive offerings, they aren’t in a position to dramatically increase competition on a wide scale basis. They simple don’t have the scale. It’s generally one community at a time. At that pace, tens of thousands of communities across this country will be lucky if they ever see facilities based competition for cable. Some will argue DBS is enough and if the market conditions are right, a community regardless of location will eventually see competition. In other words, you can’t force competition on a market where the returns for multiple operators don’t warrant it.