DBRS Conf EchoStar Communications Corp & EchoStar DBS Corp

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of EchoStar DBS Corporation’s (“EchoStar” or the “Company”) Senior Unsecured Notes at BBp and EchoStar Communications Corporation’s Convertible Debt at BB (low)p. All trends are Stable.

The ratings are supported by EchoStar’s 11.2 million subscribers, the Company’s ability to service virtually all U.S. homes through its fleet of satellites, stable cash flow from operations, moderate churn levels, and relatively low capex requirements.

DBRS notes competitive pressures are increasing customer inducements (through equipment subsidies and programming credits) necessary to attract and grow satellite subscribers. This in turn is pushing subscriber acquisition costs higher (currently US$667 per subscriber), which impacts profitability and liquidity. As satellite service matures, the incentives necessary to convince laggard consumers or cable subscribers to sign up to satellite service will increase. Cable operators can also bundle other services (such as high-speed Internet access and, in a growing number of cases, telephony service) with their video offering, which may impact EchoStar’s subscriber growth. Once a cable subscriber is bundled and enjoys savings and one-bill convenience they are less likely to switch to satellite service. Furthermore, telco operators are preparing to launch video service, representing a new entrant.

To counter these threats, DBRS notes that EchoStar has introduced a lease equipment program, which should help to alleviate pressure in subscriber acquisition costs, through redeploying returned equipment. EchoStar has also partnered with SBC Communications Inc. (“SBC”) in order to bundle video and telephony. However the partnership is expected to be short-lived and thus is weak, as SBC is preparing to launch video service over its own infrastructure. Lastly, EchoStar has increased the number of markets (from 110 to 163) in which it provides local channels, mostly in rural areas that are typically underserved by cable operators.

Overall, EchoStar’s ability to generate positive free cash flow through strong operating performance and controlling both subscriber acquisition costs and churn level will be key rating considerations for DBRS going forward.

Note:
p - This rating is based on public information.