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DirecTV to Begin Leasing the Set Top Box

In-Stat reports that DirecTV has notified its retail partners that beginning in March it would start leasing its set top boxes instead of selling them. This notification marks a significant change in DirecTV�s business model.

DirecTV, which currently has over 15 million subscribers, is the largest satellite TV service provider in the US. Traditionally the company has sold its digital set top boxes through retail electronics stores. This meant that a consumer interested in DirecTV�s pay-TV services had to purchase a set top box (or boxes) along with the satellite dish before they could start watching TV.

This model was in stark contrast to cable TV operators who have always leased their set top boxes to those subscribers who needed them. For most cable subscribers, the cost per month averages between $5 and $8 and it is attached each month as part of the household�s cable bill. Cable operators have experimented several times over the past five years with selling their set top boxes, but a general lack of enthusiasm among cable subscribers has effectively ended the experiments.

A DirecTV spokesperson stated that the change was driven by their desire to make it easier for their customers to deploy more advanced (and more expensive) boxes that support High-Definition (HD) and Personal Video Recording (PVR) capabilities. Set top boxes with these advanced capabilities often cost over $300. Allowing customers to lease the boxes is expected to achieve two goals:

* Reduce up-front costs associated with subscribing to advanced services.
* Allow customers to upgrade or change set top boxes without buying a new box.

Another advantage to the lease-based model that was not highlighted is its ability to lower DirecTV�s Subscriber Acquisition Costs (SAC), which are coming under increasing scrutiny by financial analysts. With their SAC currently north of $600 per subscriber, DirecTV�s new model should permit them to pass some of that cost directly to the consumer. In addition, it may also put an end to the subsidization of lower-end set top boxes that often provide satellite TV hardware to new subscribers at little or no cost.

A final advantage of a lease model comes from the impending change from set top boxes using MPEG-2 video compression technology to MPEG-4 technology. With DirecTV promising to switch to MPEG-4-based services this year, a lease-based model should allow them to side-step consumer complaints about forcing the purchase of new set top boxes that use MPEG-4.

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