LOS ANGELES - Eddy Hartenstein seems pretty calm for a guy about to launch one of the biggest gambles yet in television technology.
Hartenstein is president of DirecTV, a unit of GM Hughes Electronics. The technology is known as direct broadcast satellite, or DBS.
Basically, a pair of high-powered, computerized satellites will beam dozens of channels of television to consumers who buy and put up a $699 receiving dish the size of a large pizza and pay about $30 in monthly charges. In most regions, DirecTV will be the first competition for cable TV.
Sounds promising. But DirecTV faces enormous obstacles. For now, it offers less programming than cable TV for about the same monthly charge. DirecTV subscribers, for instance, won't get any local TV channels. And competitors are lining up. Cable and phone companies are building fiber-optic systems that could deliver up to 500 channels at a time. Another DBS system, Primestar, is set to compete, though it offers fewer channels than cable or DirecTV.
The bottom line: DirecTV cost $600 million to $1 billion to build. It has zero customers today. It went through trial runs in April and is scheduled to start regular service this month. The service needs to sign up more than 3 million subscribers within a couple of years just to break even.
Yet Hartenstein - and some industry experts - are undaunted. "DirecTV has a tremendous chance," says Jimmy Schaeffler, an independent analyst working for Paul Kagan Associates. "It doesn't have to reach that many TV households to be successful. Three million customers is not such a big chunk."
Hartenstein says "our chances are extremely good." He has a mischievous look behind his silver hair and beard, makes wry quips and shows visitors his office's panoramic view of Los Angeles International Airport. Then he runs down a long list of what DirecTV has in its favor and hits the critical point: While cable TV has been promising hundreds of channels and digital-quality TV pictures, DirecTV will start selling that kind of service immediately.
"People will get tired of waiting for cable companies to do this," he says.
Hartenstein is shooting for 10 million subscribers by 2000, each paying an average $30 a month. That adds up to $3 billion-plus in annual revenue. At that point, analysts say, net income could readily surpass $1 billion a year.
DirecTV's chief asset is its technology. The two DirecTV satellites are the most advanced Hughes has built, and Hughes is the world's No. 1 satellite company. Each costs $200 million. One was launched in December. The other is scheduled to go up in July.
The company spent $100 million more to build a ground facility in Castle Rock, Colo. It will convert feeds from cable TV programmers such as CNN and ESPN into digital form - the language, based on the numerals one and zero, used by computers - and send them to the satellites.
DirecTV will use a new technology called digital compression to squeeze eight channels of programming into the broadcast space normally taken up by one channel. The satellites are the first that can bounce compressed digital signals back to earth. That's important because compression actually makes the system economical. DirecTV can offer 150 channels using just two satellites instead of eight, 10 or more.
To get DBS service, consumers will have to go to an electronics store and buy an 18-inch rooftop satellite dish and a VCR-size box that plugs into a TV and a remote control. The dish doesn't have to be a huge backyard monster to collect the signals because the DirecTV satellites are unusually high-powered - 120 watts per channel vs. 5 to 45 watts for most TV satellites.
DirecTV's dish and set-up box will cost $699 for at least the next year or so, while European electronics company Thomson - the parent of RCA - has exclusive rights to make the devices. But after that, Sony and other manufacturers will come in, probably driving down the price to $300 to $400, says Schaeffler. "How fast it will get there is anybody's guess," he says.
Each subscriber gets a computerized card that slides into a slot on the box. The card tells the box what services you've paid for and records charges for pay-per-view programs such as championship boxing or movies-on-demand. Once a month, the card tells the box - the box has to be plugged into a phone line - and send in billing information.
The technology may be top-shelf, but then the drawbacks kick in. First among them is cost. Hartenstein says "early adopters" - people who rush to get new gizmos - and people who live in areas without cable will gladly pay $699. And lots of urban and suburban consumers will sign up simply out of anger at cable TV companies that charge a lot and serve customers poorly.
But Michael Elasmar, a professor at Boston University who has studied DBS, says he's having a hard time justifying spending that much for DirecTV's system for his own house - especially since subscribers still have to pay a monthly fee. "And I'm an early adopter," he says.
Also, the system can't offer the kind of interactive TV promised by phone and cable companies that are leading the the information highway stampede. They promise educational shows kids can play along with or news reports tailored to individual interests.
The adage these days, though, is that people don't buy technology, they buy programming. And Hartenstein plans to focus on content. "We're going to offer something of the familiar and something of the different," he says.
The familiar includes many of the usual suspects on cable TV, including C-SPAN, CNBC, Court TV, USA Network. The different includes Bloomberg Direct, an exclusive DirecTV business news channel, and 25 to 30 pay-per-view movies at one time.
Big sports deals are coming soon, Hartenstein promises. "There's no question we'll do it," he says. DirecTV wants to broadcast six or seven NBA games each night and that many NHL games, and charge about $3 a game. A big goal: Broadcast every NFL game on a Sunday. DirecTV subscribers could choose which to watch, for a fee. But DirecTV has yet to sign any major league sports contracts.
The 150-channel capacity of DirecTV does not mean subscribers automatically get 150 channels of programming. It gives the system the flexibility to offer all those pay-per-view movies and games. Once Hughes gets the second satellite in orbit, a package of 38 channels will cost $29.95. Pay movies or sports will cost extra.
Another drawback: DirecTV can't carry local TV stations. So subscribers won't get the four networks, PBS stations or independent stations. They'd have to set up an antenna or get basic cable to pull in those channels.
And the programming soon may fall behind competitors. Cable and phone company fiber-optic networks are expected to offer thousands of channels of capacity plus interactive services and even phone service. Those networks may not be ready for years. But Tele-Communications Inc. - the nation's biggest cable TV provider - announced in April that it will start using digital compression to offer 500-channel TV to some of its 10 million customers this year.
Such landbased systems threaten to chase DirecTV out of urban and suburban markets. Hartenstein says: "We have to grab our market share in the next six years and hold onto those customers with high-quality service. If we do that, we'll be successful" over the long term.
It's going to be a tight squeeze pushing two satellites and $600 million through that narrow window of opportunity.
How DirecTV satellite system would work: DirecTV plans to launch its direct broadcast satellite TV service this month. A look at the system:
-- Two $200 millions satellites beam digital signals to earth. One satellite went up in December. The other goes up in July.
-- A $100 million ground station compresses the digital signals, fitting eight channels into the space normally taken by one.
