What's the Frequency, DirecTV?

The war for couch potato dollars continues. Like any war, it costs money, but satellite-TV provider DirecTV (NYSE: DTV  ) hopes that it's an investment in future competitiveness.

I've often railed against quarter-to-quarter earnings obsession, but that's the way the Street works, so there's little to be gained from just ignoring the quarterly numbers. To that end, revenue rose about 10% overall and 12% in the United States. Profits were higher, whether measured in operating income (up 138%) or operating income before depreciation and amortization (up 87%). Those numbers looked reasonably good, as did the free cash flow information.

Less positive were some of the underlying metrics. Net subscriber additions of 125,000 looked a little soft, and though the churn rate improved, I get the sense that many investors were hoping for a better performance there as well. It's also worth noting that subscriber-acquisition costs were down slightly at about $642 per subscriber.

That's all well and good, but investors' obsession right now revolves mostly around how the company will withstand increasing competition from cable and phone operators. Everybody has heard about the bundled offerings from the likes of Time Warner (NYSE: TWX  ) , Comcast (Nasdaq: CMCSA  ) , Cablevision (NYSE: CVC  ) , and so on -- you get your cable, phone, Internet, and so on from one of these providers and write one big, fat check with a theoretically lower price than if you got all of those services separately.

Phone companies are increasingly looking to get into the game as well. Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) can already offer phone, wireless, and Internet service, and they're currently laying cable with an eye toward competing in TV as well.

In response, DirecTV and rival EchoStar (Nasdaq: DISH  ) are spending more on high-definition offerings, advertising, exclusive content deals (such as NFL Sunday Ticket in DirecTV's case), and new service offerings. To that end, a joint venture of the two satellite broadcasters and Liberty Media plunked down almost $1 billion in down payments for the new spectrum auction, presumably to guarantee a competitive spot in wireless broadband.

I wouldn't rule out a possible merger between DirecTV and EchoStar, which would create a much stronger survivor. Although government regulators blocked a merger attempt back in 2002, the competitive factors at work now, including the bundling of different media resources, could cause such a merger to be approved. But even if DirecTV stays relatively independent (News Corp. has a significant stake), it could still hold its own in the battle for eyeballs and wallets. But as in any battle, there will be victories and setbacks along the way, as well as a lot of cash flowing out of the company to stay competitive.

For more Foolish thoughts on media:

Time Warner is an activeMotley Fool Stock Advisorrecommendation, and AT&T is a former pick of that same service. If you want to see what other great stocks Tom and David Gardner are selecting for subscribers of the newsletter, take a free trial today.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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