Recent steps taken by DirecTV to reduce its subscriber acquisition costs could impact retailers' DBS profitability, said Dan Wewer, chief financial analyst with Deutsche Banc Alex. Brown.
In a recent research note to RadioShack investors, Wewer stated that several of DirecTV's steps to control costs, as indicated by the recent release of an earnings update from parent Hughes Electronic's, could "impact business at the retailers."
DirecTV is taking corrective steps, he said, due to increases in the number of illegal subscribers as well as second set (IRD) sales (which provide an additional $4.99 per month each in revenue, while equipment subsidies and commissions remain high).
Counter measures by DirecTV include reducing "commission costs through a greater emphasis on direct selling. This is expected to generate sales of several hundred thousand this year and would take away some share from the retailers," Wewer warned.
Then, DirecTV will pay commissions based on activation rates instead of sales.
"An interim agreement with RadioShack to move to this model has been reached, and we expect that other CE retailers will follow suit," he said. "This will likely reduce the top line growth for DirecTV systems at retail but the profitability of the category will improve.
"We understand that with RadioShack's agreement, the new commission rate will be fixed but slightly higher than the previous sales-based rate," he said.
Additionally, DirecTV will place more emphasis on its equipment leasing plan, which allows for system "recycling" when a customer churns out.
"This is somewhat negative for the retailers because commissions from sales of new equipment may be impacted," Wewer stated.
Commenting on the Deutsche Banc Alex. Brown note, DirecTV spokesman Bob Marsocci acknowledged, "We're looking to strengthen all distribution channels — CE, independent and direct sales, which include the new lease plan. While our CE contracts are proprietary, we did negotiate a new agreement with RadioShack based on a pay-per-activation fee.
"Nonetheless, we're looking at all channels for stronger sales, and we're looking at such initiatives as our NFL Sunday Ticket offer [available in early August] to boost sales across the board."