DirecTV, the largest direct-broadcast satellite television provider and the third-largest pay-television provider in the United States, today reported a 10.4% increase in earnings due largely to an uptake in digital video recording (DVR) and high-definition (HD) services. DirecTV subscribers are spending nearly $100 per month in these two areas, bringing in an ARPU 50% greater than a subscriber without advanced services.

DirecTV now has more than 7 million subscribers with advanced services, totaling 40% more than a year ago. Both DVR and HD growth have been strong enough, that the satellite company is looking toward offering video on-demand (VOD) only as a longer-term strategic move. Chase Carey, president and CEO of The DirecTV Group, said DirecTV will roll out its VOD product by the end of this year’s second quarter, as well introduce new content deals. As of now, VOD continues to be a longer-term proposition.

“DVR and HD are much more powerful forces in the marketplace today,” he said. “VOD will continue to grow but over a longer time frame. There are some content issues in terms of Windows and the like that are starting to be addressed, but it takes time.”

The growth in DVR and HD is attributable to the fact that hardware costs were 60% lower than last year for introducing the services. DirecTV is rolling out an aggressive set-top box (STB) cost-reduction plan as well as increasing usage of refurbished boxes through its lease program. The satellite provider is also in the process of upgrading its DVR STBs to MPEG-4 as the cost has gone done from more than $400 in mid-2007 to now less than $200. Carey said they are still on the back half of making this transition, but continuing to stretch out the upgrades has benefited the company.

In terms of wireless video plans, Carey said that it is part of DirecTV’s long-term proposition but not in the next few years. As of now, with WiMax not yet built out and wireless core services not a significant part of the bundle today, DirecTV will continue to put its focus elsewhere. Competitors AT&T and Verizon are pushing mobile TV services into the market, but Carey does not believe it will affect DirecTV’s business in the next couple of years, as they continue to get a feel for the consumer appetite for mobile video.

“Building out wireless infrastructures to compete with AT&T and Verizon on 4G is clearly going to be a fairly challenging proposition,” Carey said. “Not that there aren’t really opportunities in video and mobility. There is a lot of ground between here and there, and we want to be smart in how we play in it. In what shape and form, we’ll continue to be thoughtful about it.”

DirecTV customer churn came in at a 10-year low, and its earnings beat investor expectations in virtually all areas. According to Bernstein senior analyst Craig Moffett, its earnings results raise the bar significantly for DISH, which reports earnings next week. DISH has faced competition from cable, telcos and strong DTV in a traditionally weak market. Moffett said DirecTV’s results are exceptionally strong and speak to consumer appeal of their product, strength of their brand and customer service proposition. That being said, he is not convinced of the satellite company’s long-term viability.

“It is reasonable to ask at this point, however, whether this is as good as it gets,” Moffett wrote of the earnings in a research note. “Despite remarkably strong performance in Q1, DirecTV now faces significant headwinds going into Q2, including normal seasonal softness, a weak HDTV selling season and the loss of AT&T's distribution relationship to DISH network.”

Moffett pointed out that long-term strategic challenges remain, especially coming in the wake of today’s announcement of a $3.1 billion wireless-broadband joint WiMax venture among Sprint, Clearwire, Comcast, Time Warner Cable, Intel and Google. After DirecTV’s Broadband over Powerline venture failed recently in Dallas, Texas, it appears that the satellite company won’t be able to compete in this market already saturated with cable and telecom competitors – not to mention the joint venture of cable and telecom.

“With Verizon and AT&T having won the lion's share of the licenses in the 700 MHz auction, it appears clearer than ever that broadband access to the home will be available exclusively from satellite's competitors,” Moffett wrote. “As broadband becomes ubiquitous, the risk is no longer that bundles might be perceived as simply marginally more attractive financially; instead, the DBS firms face the risk of complete competitive foreclosure.”

Clearwire hasn’t had any meaningful part of DirecTV’s business, Carey said, adding that he views the announcement as positive overall but without a near-term impact on the satellite company. “Anything that drives energy and action in the broadband space is positive,” he said on the call.

DirecTV Group also announced today that media mogul John Malone's Liberty Media Corp. agreed to restrict its voting interest to 48% in exchange for DirecTV's increasing its share repurchase program to $3 billion, funded by up to $2.5 billion in new debt and dispelling expectations that Liberty would attempt to buy the whole company.

The satellite firm, which covers 150 markets in the US, reported a net income climb to $371 million in the quarter’s first three months, up from $336 million a year ago. Revenue rose 17% to $4.59 billion from $3.91 billion. Despite strong telco subscriber uptake and cable’s relatively steady earnings, as well as a weakening housing market, DirecTV reported adding 275,000 net US subscribers, increasing its domestic subscriber base by 5.2% to 17.1 million. Out of these new and existing subscribers, average monthly revenue per subscriber rose 8.6% from a year ago to $79.70. This was driven both by price increases for programming, higher fees for HD and DVR equipment and services and increased take-up of pay-per-view.

“Our business remains as competitive as ever,” Carey said. “The fact of the matter is that we have unique strengths, which are in many ways getting stronger, and we are competing very effectively against the bundle and other market forces out there.”