DIRECTV 2002 Annual Report Download - page 21

HUGHES ELECTRONICS CORPORATION
Latin America has faced very difficult economic and political conditions over the last two years.
Major markets, such as Argentina, Brazil and Venezuela, have been experiencing significant currency
devaluations, high unemployment rates and/or civil unrest due to economic and political uncertainty. As
a result of these conditions and its high fixed costs and substantial debt levels, DLA has increased its
focus on cash conservation and is in discussions with certain programmers, suppliers and business
associates. These discussions are aimed at addressing DLA’s current financial and operational
challenges with the objective of reducing the cash requirements of the business and restructuring DLA
to increase the likelihood of achieving long-term profitability. If the discussions do not result in a
reasonable agreement in the near future, DLA would consider other options, including the restructuring
of the company under Chapter 11 of the U.S. bankruptcy law. Even if DLA does seek court protection,
there are no plans for any of the LOC’s to seek court protection. Thus, operations in all of the markets
across Latin America are presently expected to continue.
Subscribers. As of December 31, 2002, DLA had about 1.6 million subscribers throughout Latin
America. DLA is pursuing a more selective growth strategy, by focusing only on those countries with
more stable economic conditions and where DLA is experiencing growth and rapid investment payback.
Additionally, DLA has in place acquisition filters such as incentives to pay by credit card, which DLA
believes will result in new customers with improved credit profiles. While this strategy will result in a
reduction in the number of new subscribers DLA attains, this more selective approach is expected to
result in lower cash requirements and churn rates and better overall subscriber economics for DLA.
During 2002, ARPU in the Latin American region was about $35 per month compared to $43 in
2001 due to significant currency devaluations in the region. In 2002, approximately $27 was generated
from monthly programming subscriptions, with the remainder derived from fees associated with leased
equipment. Unlike DIRECTV U.S. where the vast majority of subscribers own their receiving
equipment, nearly all DLA subscribers lease their equipment from the LOC’s.
Programming. The broad geographic reach of the DLA network enables the company to obtain
high quality and sometimes exclusive programming from leading international programming providers.
Under long-term programming agreements with HBO Latin America Group and Buena Vista
International, Inc., DLA has exclusive rights to direct-to-home distribution of the HBO and Cinemax
channels in Brazil and Argentina and The Disney Channel programming in all Latin American markets
except Puerto Rico. DLA has entered into agreements with the eight leading U.S. motion picture
studios and more than 20 independent motion picture studios for distribution of their products. In
addition, DLA’s programming includes numerous popular sports, special events, family and other
offerings on channels such as ESPN, Discovery, MTV, CNN, BBC, Nickelodeon and USA. DLA enjoys
local programming affiliations in each of its markets, including longstanding local alliances with the
Cisneros Group in Venezuela and Clarin in Argentina. In 2001, DLA secured a contract for the
exclusive rights to broadcast and re-sell the FIFA World Cup soccer tournaments, occurring in 2002
and 2006, in Argentina, Chile, Colombia, Mexico, Uruguay and Venezuela.
DLA has introduced a wide range of multimedia products in Argentina, Brazil, Venezuela, Mexico
and Puerto Rico, including interactive television applications such as online information and financial
applications, video games, an interactive television program guide and e-mail applications. DLA
believes these Internet-like applications, when bundled with its high quality programming, will be
attractive to existing and prospective subscribers. DLA is developing these enhanced technologies in
cooperation with leading technology developers and content providers.
Sales, Marketing & Distribution. LOC’s manage on-going sales, marketing and customer service
functions in their respective localities. Hughes believes that controlling ownership of the LOC’s will
allow DLA to more effectively implement pan-regional strategic initiatives and manage the day-to-day
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