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Dish Mutating Into a Broadband Company

Brian Santo
2/18/2016
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Dish Network increased its revenue in its fourth quarter of 2015, but lost another 81,000 subscribers. It posted a loss, due to some special charges, including a half-billion dollar expense for spectrum purchased at auction last year.

Sifting through Dish's churn numbers reveals the company is experiencing a transformation. As of the fourth quarter, about 10% -- maybe more -- of the company's customers are subscribing not to the company's traditional satellite-based service, but to its new broadband-based Sling TV service.

Dish Network LLC (Nasdaq: DISH) signed up 2.7 million customers in the fourth quarter (it lost 81,000 more than it gained) and, according to the company, "The increase in our gross new Pay-TV subscriber activations primarily related to the activation of Sling TV subscribers."

The 10% estimate assumes "primarily" means at least a little more than half, or 1.4 million customers, of the 2.7 million new sign-ups. That number gets divided into 13.9 million customers total as of the end of the fourth quarter. Ten percent is a low estimate; the percentage could be as high as 17%.

The company positions itself as the low-cost alternative to other major video providers, but as such, it's in an increasingly tenuous position. Currently, MVPDs can grow their subscribership only through attracting viewers away from each other, Dish notes in its 10-K. Meanwhile, rivals are increasingly offering low-cost skinny bundles. Dish has countered with the budget broadband-based Sling TV service, but it does so at the risk of diminishing its own ARPU, its 10-K said.

The satellite providers, Dish and DirecTV, have always born high subscriber acquisition costs. DirecTV is now able to rely on the marketing muscle of new owner AT&T Inc. (NYSE: T) to help drive those costs down, but Dish reports it is in a situation where subscriber acquisition and retention costs are more apt to go up than down.

With 13.9 million subscribers, Dish still ranks among the biggest MVPDs in the US, but its biggest rivals keep getting bigger, more diversified and/or international while Dish isn't getting any of those things. Top competitors include Comcast Corp. (Nasdaq: CMCSA, CMCSK), Verizon Communications Inc. (NYSE: VZ), AT&T/DirecTV, Charter Communications Inc. /Time Warner Cable/Bright House Networks (assuming that deal gets approved) and Altice /Suddenlink/Cablevision (the Cablevision deal is also still pending approval).

Operational diversification remains a possibility, though. Dish already owns wireless spectrum, directly or through subsidiaries purchased over the years. The company placed winning bids in last year's AWS-3 FCC spectrum auction, hence its $516 million fourth quarter charge.


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Dish said it will have to raise a significant amount of capital for a wireless build-out, and partnering with another company or companies is a possibility. The company would be entering a market that most analysts believe can support three major carriers. There are four now (AT&T, Verizon, T-Mobile, Sprint).

The company did not provide any hint of a schedule for implementing a wireless plan in its 10-K. The company is not required to have done anything with most of its spectrum holdings until 2020 or 2021, according to the document.

Of course, Dish has been and remains a favorite object of merger speculation. Dish and DirecTV danced around joining forces for years before AT&T bought DirecTV. AT&T's takeover is recent, but is already showing signs of being successful, thus inspiring dreams on Wall Street that Verizon will copy the strategy and buy Dish.

Dish did not comment on any specific rumors, but did say in its 10-K that "It may be difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders, because of our ownership structure."

With his stock holdings, CEO Charlie Ergen controls approximately 78.5% of voting power in the company. Nothing happens to Dish without his approval.

The company also took a charge of $123M for impairment of its D1 satellite and related ground equipment in Q4. The company has had trouble with this satellite before, taking an impairment charge for it a year ago, in the fourth quarter of 2014. Dish has two new satellites scheduled for launch in the second half of this year that will have enough signal capacity to compensate and then some.

— Brian Santo, Senior Editor, Components, T&M, Light Reading

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