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?

DirecTV announced the availability of its video-on-demand service on a nationwide basis. DirecTV’s VOD solution utilizes content delivery over broadband networks, as well as “pushes” content to compatible DVRs via satellite. Customers are required to have a DirecTV Plus HD DVR or R22 DVR receiver, as well as subscribe to broadband. DirecTV says the service offers more than 4,000 standard-definition and HD titles. The service has been in limited trials before the nationwide launch.

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.

DISH Networks reported disappointing results for the first quarter 2008 in a SEC filing. DISH indicated competition from cable and telecom carriers are main factors in their 89% decline in subscriber growth, which netted only 35K net subscribers. In the 10-Q filing DISH says, “We believe that this declining subscriber growth has been driven in part by competitive factors including the expansion of fiber-based pay TV providers, the effectiveness of certain competitors’ promotional offers, the number of markets in which competitors offer local HD channels, and their aggressive marketing of these differences.” This report offers a strikingly different result from DirecTV’s recent results which reported 275K net new subscribers, a 17% increase. DISH will officially report their quarterly results on Tuesday.

DISH appears to be falling victim to both telco and cable triple play success, and to DirecTV’s continued HD superiority. DirecTV is maximizing its HD lead over all competitors, and in DISH’s case, their advantage appears to be widening. Add telco and cable’s triple play competitive advantage, and DISH looks like it is in for a rough few quarters. They’ll have a difficult time reversing the trend, because their historical value play of low cost is vulnerable to the savings perception of the triple play bundle. Adding insult to injury, they have no trump card like DirecTV does with HD and high end sports programming. They even face a HD setback, whose timing couldn’t be worse, caused by a recent satellite launch mishap. It all adds up to an ugly situation from a DISH investor point of view. Their competitors are salivating at the prospects of luring DISH’s 13.8 million subscribers.

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.

Verizon announced the expansion of high definition VOD service to eight additional states. With the expansion, Verizon’s HD VOD service is now available in California, Delaware, Florida, Indiana, Maryland, Massachusetts, New Jersey, Pennsylvania, Rhode Island, Texas and Virginia. Verizon says they will average about 1,000 HD VOD titles per month. Verizon joins other "terrestial" video operators trying to leverage HD VOD against the perceived HD advantage for linear channels offered by DirecTV and DISH Networks.

DirecTV and Current are pushing broadband over power lines (BPL) in the Dallas market. Current has equipped 130,000 homes with the service and DirecTV is beginning to market it. Packages range from a 1.5 Mbs symmetrical connection for $20/month to an 8 Mbs connection for $35/month. No word yet on penetration figures. There has been a delay in the rollout, due to Current waiting on new electricity meters that have to be installed at each home, replacing older ones.

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.

It’s official. John Malone’s company, Liberty Media, has taken a controlling equity stake in DirecTV. The transaction cleared the last remaining regulatory hurdles on Tuesday. It’s quite an interesting twist a fate. Malone has always been identified as a pioneer in the cable business, helping to position it as the competitive power house that it is today. Now, he’s in control of one of the cable industry’s arch nemesis – DirecTV, and he makes no apologies for now putting his legacy industry squarely in his current “cross hairs.” Malone tells BusinessWeek that DirecTV can now "take on cable television as their strongest U.S. competitor." Truth be told, this is less about competitive positioning and more about making money.

In my opinion, Malone's end game is not to dig in and battle the cable industry over the long term. Rather, it’s to flip DirecTV and add to his many billions. Malone is gambling that either Verizon or AT&T will come calling, and buy DirecTV outright. Despite all the hype of FiOS and U-verse, both Verizon and AT&T cannot cover their entire footprint with a triple play offering. There’s not enough time or money to accomplish that. The only way to truly cover their entire footprint with a video option and compete with cable at every turn is DBS. After all, the top five telcos in the U.S. all have current partnership deals with either DirecTV or DISH. Some will argue that it’s just a matter of time before the two biggest guys on the block, AT&T and Verizon, decide to take these existing relationships to the next level and acquire their DBS partner. Malone believes that, and he’s betting that it will end up as a handsome payday for him. The only question is how long will it take. Any guesses?