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Investment Overview for Dish Network (NASDAQ:DISH)
WHAT HAS CHANGED?
- Dish in no hurry to monetize its spectrum holdings
Dish CEO Charlie Ergen stated on a recent earnings call that they have not finalized any plans regarding how they want to monetize their spectrum holdings. Ergen had stated earlier that the cancellation of the $3.3 billion discount Dish received in the AWS-3 spectrum auction might derail future plans. However, instead of paying the amount, Dish decided to relinquish $3.4 billion worth of its AWS-3 spectrum to the FCC. Ergen now believes that forfeiting the spectrum was a good decision, as it leaves most of the company’s options still open in terms of how they want to use their spectrum. As the FCC’s incentive auction deadline passed in January, the commission will not allow any spectrum related transactions until the incentive auctions have been conducted. Hence, Dish can only enter into any sort of spectrum deal after the auction's conclusion.
Dish’s current stance leads us to believe that the company is in no hurry to start making money off of its spectrum investment. Dish is more concerned about making sure that it chooses the most optimal option when it comes to monetizing its spectrum holdings. However, Dish’s AWS-4 spectrum licenses are subject to certain interim and final build-out requirements by the FCC. Dish must provide reliable signal coverage and offer service to at least 40% and 70% of the population in each area covered by the AWS-4 licenses by March 2017 and March 2021, respectively. The company has a limited amount of time, and if it fails to reach a deal which puts its spectrum to use, the FCC’s clock might run out. In that scenario, the company might have to sell at a huge discount or even worse, completely relinquish the spectrum to the FCC.
- Sling TV helps in reducing the pace of video subscriber decline
Dish lost 81,000 video customers during the full year 2015, and would have lost more had it not been for its online streaming service, Sling TV. The company has started including metrics of Sling TV into its reported pay-TV numbers since Q2, and the net subscriber adds of Sling TV has helped reduce the rate of decline in the pay-TV subscriber base. Dish’s management believes that Sling TV is well poised to take advantage as consumers increasingly shift to alternative platforms in order to consume content. The company management has previously stated that their immediate goal is to keep the service attractively priced in order to gain more subscribers. The pay-TV market has become increasingly saturated and pay-TV companies have lost thousands of customers over the past few years. The availability of content on online streaming platforms such as Netflix, Hulu, HBO Go, etc., is encouraging traditional pay-TV subscribers to shift to such platforms. In such a scenario, offering Sling TV at competitive pricing is a good strategy for Dish, as it will help the company in reducing the pace of decline in its traditional pay-TV subscriber base.
Below are key drivers of Dish Network's value that present opportunities for upside or downside to the current Trefis price estimate for Dish Network:
Fee per Satellite TV Subscriber: We estimate this figure will increase from about $64 in 2015 to about $76 by the end of our forecast period. However, there could be an upside of around 10% to our price estimate if this fee were to rise to $110 instead. This could be possible if programming costs rise too much, making it unfeasible for Dish to absorb them, and then passes on a significant portion of these costs to the end consumers.
Dish Network Pay-TV Market Share: We estimate this figure to be around 12.9% by the end of our forecast period, as compared to 14% in 2015. However, there could be about 5% upside to our price estimate if Dish Network can lift its market share to 15% by end of our forecast period. On the other hand, if this figure were to decline to 10%, there could be downside of more than 5% to our price estimate.
Dish Network Gross Profit Margin: We estimate that Dish Network's gross margins will go down from 41% in 2015, to around 39% by the end of our forecast period. There could be an upside of more than 5% to our price estimate if Dish can get back to 45% gross margin levels seen in the late 2000's, by continuing to focus on a quality subscriber base and increasing its prices.
For additional details, select a driver above or select a division from the interactive Trefis split for Dish Network at the top of the page.
Dish Network is the third largest pay TV provider in the U.S., after Comcast and AT&T-DirecTV. The pay TV market includes cable providers such as Time Warner Cable, Comcast, and Cablevision, satellite providers such as AT&T-owned DirecTV and Dish Network, and telecom providers such as AT&T and Verizon, that offer fiber optic TV services. More than 85% of the TV households in the US subscribe to Pay TV services. Dish is the second largest satellite TV provider in the U.S. after DirecTV.
Dish makes money by charging digital TV subscription fees to customers, selling digital TV boxes, selling premium services like HD and DVR, and by charging advertisers to advertise on some the channels it carries.
Dish Network acquired DBSD North America and TerreStar in 2011. These were strategic investments by Dish in which the company got access to valuable AWS-4 spectrum that could help it in building a wireless network. Dish also made a successful bid for H-Block spectrum in 2014 and AWS-3 spectrum in 2015, taking its total spectrum holdings to 81 MHz. Dish is currently the fifth largest holder of wireless spectrum in the U.S. and the pre-tax value of its spectrum is around $30.4 billion, according to our estimates.
The majority of Dish's value comes from its spectrum holdings and its core satellite TV service. Although the company offers customers additional services like HD and DVR service, the value contribution of these services to Dish's overall value remains limited due to the lower fees charged for these services, and the limited number of Dish customers that opt-in for these additions.
Appreciation in Dish's spectrum holdings
Dish has made significant investments in spectrum over the past few years and is now the fifth largest holder of wireless spectrum in the United States. The company has spent a combined sum of $13.6 billion in acquiring its spectrum. The value of spectrum in the U.S. has increased with time due to its growing demand in the wireless industry. This demand can be gauged from the AWS-3 auction conducted by the FCC in early 2015. The auction raised a total of $44.9 billion by auctioning 65 MHz of spectrum. Dish currently owns licenses to more than 80 MHz of spectrum and we estimate the pre-tax fair value of Dish’s spectrum holdings to be around $30.4 billion.
High Fees for Satellite Service
The Fee per Satellite TV Subscriber for Dish's core offering was about $64 per month in 2015. In comparison, we estimate that Dish charges around $7 per subscriber per month for DVR service and around $10 per subscriber per month for HD service, which are considerably below Dish's Fee per Satellite TV Subscriber.
Limited Number of HD and DVR Customers
At the end of 2015, Dish had about 14% market share in the US Pay TV market, representing around 14 million subscribers. We expect Dish's market share to decline slightly throughout our forecast period. The total number of subscribers to Dish's satellite service is the upper limit on the number of HD and DVR customers that the company can have. Currently, approximately 68% of Dish subscribers opt-in for DVR service, and we expect this figure to rise to about 82% by the end of the Trefis forecast period. Similarly, HD service is used by around 78% of Dish customers today, and we expect this figure to rise to beyond 90%.
Dish's strategy of acquiring wireless spectrum, bundling of services (TV, internet, phone), and increased competition from telcos (AT&T, Verizon) are the primary trends impacting Dish.
Dish's strategy of amassing spectrum
There is a looming spectrum crunch in the U.S. wireless industry given the increasing data needs of mobile customers. Realizing this spectrum crunch and the associated opportunity, Dish Network has been strategically amassing spectrum. The company currently has more than 80 MHz of spectrum holdings including 40 MHz of AWS-4 spectrum, 10 MHz of H Block PCS spectrum, and 25 MHz of AWS-3 spectrum.
The AWS spectrum supports LTE and can be used by wireless phones and other mobile devices for voice, messaging, and data services. Most smartphones are AWS-enabled and can communicate using this spectrum. The H Block spectrum band is adjacent to, and can be paired with, Dish's AWS-4 licenses, which is highly desirable. Another desirable aspect is that the AWS-4 and H Block spectrum cover every territory in the United States. Dish can now move forward with a number of options such as launching its own nationwide wireless network, partnering with an existing wireless carrier, or leasing/selling the spectrum.
Competition rather than Cooperation with Telcos (e.g. AT&T and Verizon)
Before AT&T's U-verse and Verizon's FiOS fiber optic TV services were launched, telcos and satellite providers would team up to provide bundled TV, Internet, and phone services to compete with triple play offerings from cable operators like Comcast and Time Warner Cable. However, telcos now compete with satellite providers in certain areas, and the level of competition will continue to increase as telcos continue to roll out their TV services.
Fiber-based providers represent one of the fastest-growing sectors in the Pay TV market
Several large telcos have upgraded old copper wire lines with fiber optic lines in their markets. The fiber optic lines provide high capacity bandwidth, enabling these companies to offer increased HD content, and the ability to bundle services.
Alternative platform threat
Dish Network, in particular, and pay-TV service providers, in general, face a threat from emerging online video platforms such as Netflix and Hulu. Although these platforms mostly provide content that is not running live on TV, they are now slowly penetrating into the pay-TV provider's core turf. Netflix's successful entry into original programming with the success of its shows, such as House of Cards, Orange is the New Black and Daredevil, is an example.
Content owners demanding more money
Dish Network has engaged in conflicts with content owners in the past over the issue of their demand for higher carriage fees. We believe Dish Network's periodic price rise is a response to cope with such demands, so that channel interruptions do not occur. Dish blocked several channels in 2014 amid carriage disputes.
Trefis Forecast Rationale for Dish Network Pay TV Market Share
This represents Dish Network's share of the US Pay TV market. The Pay TV market includes cable providers such as Time Warner, Comcast and Cablevision, satellite providers such as DirecTV and Dish Network, and telecom providers such as AT&T and Verizon that offer fiber optic TV services. More than 85% of TV households in the US subscribe to Pay TV services.
Pay TV viewers have to subscribe to a connection from one of the operators and pay for the service on a monthly basis. The contracts are usually time bound (especially in case of satellite subscription).
Dish Network is the third largest Pay TV service provider (after Comcast and DirecTV) and the second largest Direct Broadcast Satellite (DBS) service provider in the US, with approximately 14% share of the US Pay TV market by the end of 2015.
Satellite pay-TV service providers started capturing market share from the incumbent cable companies in late 1990s and started stabilizing several years back. The primary reason behind these service providers capturing the market share was enhanced picture quality due to digital programming, improved standards of customer service and introduction of advanced technologies like HD programming and DVR service.
However, the pay-TV industry has been on the decline for the past few years and this trend has started affecting Dish, too. Dish lost 79,000 subscribers in 2014 and 81,000 in 2015. We believe that Dish will continue to lose subscribers in the coming years. Consequently, the company's pay-TV market will decrease throughout our forecast period.
We considered the following factors for this forecast:
- Intense competition and market saturation
- The U.S. pay-TV market is getting increasingly competitive. Furthermore, the cable companies seem to be reviving themselves, with Comcast being the prime example. This is likely to make it difficult for Dish Network to gain market share.
- The U.S. cable market is more or less saturated, with limited scope for expanding the subscriber base.
- In an intensely competitive operating environment, the easiest way to gain market share is by acquisition. However, the FCC is unlikely to view any significant acquisition favorably.
- Emergence of alternative platforms for consumption of content
- The emergence of alternative platforms, such as online streaming, has also started eating into the pay-TV subscriber base.
- Netflix is already an established player in the online streaming market. Other content providers including Sony, HBO, CBS, and Dish itself have also launched their own services.
- Online streaming options offer a cheaper alternative as compared to traditional pay-TV packages which cost around $65-70 per month on average. The availability of these cheaper alternatives is inducing many pay-TV subscribers to cut the cord.
Back to Company Overview
- Move to build wireless broadband network
- Dish Network acquired satellite operator DBSD North America, which was restructuring its business after bankruptcy, and TerreStar Networks in 2011.
- The move was a strategic investment by Dish, in which the company got access to valuable spectrum that could potentially help it in building its wireless data network in the future.
- If the company can effectively capitalize on the acquired spectrum, it could help itself survive in severe competition and hold on to market share.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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