Here's a logic puzzle. Despite the growth of its over-the-top skinny bundle service Sling TV, Dish today reported a decline in total video subscribers for 2016 and a small rise in average revenue per user (ARPU). That's a counterintuitive result. Sling TV is markedly cheaper than satellite TV service from Dish, which should make it easier for Dish to attract new video customers. At the same time, the addition of more Sling TV customers to the Dish subscriber mix should be putting serious downward pressure on ARPU.
So what's going on?
At a best guess, Dish Network LLC (Nasdaq: DISH) is simply in an interim phase in its evolution as a pay-TV provider. While the company doesn't break out its customer numbers between traditional subscribers and new Sling TV subs, an estimate from MoffettNathanson pegged the number of Sling TV customers at nearly 1.1 million as of November. (See Dish Bleeds More Subs, Faces OTT Rival.)
That's a significant number, but it still pales in comparison to the number of satellite TV subs on Dish's roster given that the company ended 2016 with 13.7 million subscribers in total. In other words, Sling TV subs aren't cutting into ARPU rates yet because they're still a small piece of the pie, and Dish is managing to offset the lower OTT pricing with higher-priced satellite TV bundles.
Dish acknowledges as much in its 10-K filing. ARPU for 2016 came in at $88.66. According to the filing, "the $1.87 or 2.2% increase in Pay-TV ARPU was primarily attributable to the DISH branded pay-TV programming package price increases in February 2016 and 2015."
The good news for Dish is that it finally had a quarter where it could report video subscriber gains -- 28,000 in Q4 -- even though it ended up in negative territory for the year, down about 226,000 subs compared to the end of 2015.
The bad news is that if continued gains come from the Sling TV side of the house while satellite subscribers slide, then Dish is likely to face ARPU declines in the near future.
Overall, Dish reported revenue of $3.72 billion in Q4, down from $3.78 billion in the prior-year quarter, but up slightly for the full year. Analysts had estimated revenue at $3.76 billion.
Net income, however, was up significantly, reaching $343 million for the quarter compared to a loss of $125 million in Q4 2015. Dish beat earnings estimates, turning in an earnings-per-share number of $0.70 for the quarter compared to a prediction of $0.66 by Wall Street watchers.
Providing color on Dish's video future, executives noted several positive trends for Sling TV. First, the return to unlimited data packages by the major wireless carriers gives Sling TV viewers more flexibility for streaming content on the go. Second, Dish is now attracting a broader audience to the Sling TV platform as it adds content to the service and as the appeal of OTT video extends beyond early adopters to more mainstream consumers.
Third, Dish Chairman Charlie Ergen pointed out on the company's earnings call that with new offerings like AT&T Inc. (NYSE: T)'s DirecTV Now service and Sony Corp. (NYSE: SNE)'s Playstation Vue coming to market, there's an accelerating trend toward positioning OTT video as a complete replacement for traditional pay-TV, rather than just a complementary add-on or skinny bundle alternative. That could help ease concerns around ARPU in the long run.
"It maybe wouldn't be my first preference for how it would go, but I think it's probably inevitable so it's probably more of a timing issue," said Ergen. "But I think that OTT today is becoming a direct replacement for cable and satellite."
Meanwhile, executives did nothing on the earnings call to put a damper on rumors suggesting that Dish may be an acquisition target in the near future. Referring to the asset swap Dish did with sister company EchoStar Corp. LLC (Nasdaq: SATS) last month, Ergen echoed analyst suggestions that the aligning of strategic businesses clears the way for future M&A activity. (See Dish Swaps for Echostar OTT Assets.)
"There's probably going to be M&A activity out there in the future, and maybe perhaps an administration that's more attuned to that, and this probably aligns the assets in a better way to participate potentially in that as well," said Ergen.
Any possible acquisition announcements will not take place until the end of the quiet period instituted by the Federal Communications Commission (FCC) around the current spectrum auction. Likewise, while Dish hinted at a significant amount of strategic wireless activity it expects to undertake in the near future, executives couldn't disclose details about plans to build a 5G network or the use of the company's existing spectrum holdings because of the FCC's anti-collusion rules. The quiet period around the auction is expected to end in the next couple of months.
What executives could say is that they clearly see wireless and video converging. Dish is looking ahead to 5G because of the added capacity it will provide for video streaming and the new use cases it will enable.
In addition to video, Ergen remarked specifically on his excitement around the Internet of Things. "The Internet of Things is so interesting because A, the fact is that billions of devices are going to be connected... and somebody's going to lead the way, and it reminds me to some degree of the advent of the Internet."
— Mari Silbey, Senior Editor, Cable/Video, Light Reading