This year has been quite exciting for the second largest satellite TV company in the U.S., Dish Network (NASDAQ:DISH). While the competition remained stiff, Dish showed some fluctuating signs of subscriber trend improvement. The company continued to push for the adoption of its Blockbuster service, kept the prices flat and continued to work with regulators to get approval for building a ground-based wireless network using its acquired spectrum. Meanwhile, its stock price rose by roughly 30% as the investors welcomed the company’s efforts.
However, despite these efforts, Dish hasn’t really been able to solve its problem yet. The company performed significantly below its rival DirecTV (NASDAQ:DTV) in Q3 2012 after showing some promising results in the first two quarters. Next year is going to be critical for the company as it starts building out its wireless network and gets back to its price increment strategy to aid revenue growth.
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Fluctuation in Subscriber Additions
Dish Network headed into 2012 with healthy subscriber momentum as it improved from a loss of 111,000 subscribers in Q3 2011 to a gain of 22,000 subscribers in Q4 2011.  This momentum continued as the company performed surprisingly well in Q1 of 2012, gaining 104,000 net subscribers and beating its main competitor DirecTV.  Q2 was seasonally weak as expected as Dish Network lost close to 10,000 net subscribers.  However, the real disappointment came in Q3 when the company lost 19,000 net subscribers while DirecTV gained 67,000. In addition, Dish recorded negative revenue growth in Q2 and just 1.2% growth in Q3. What initially appeared to be a significant turnaround in subscriber trends, no longer seems to be there.
Some of this can be attributed to the initial rush and excitement of subscribers towards Dish’s launch of Blockbuster streaming service. However, compared to Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) Prime, Blockbuster seems to be lacking and that’s expected due to its relatively late entry to the online streaming market. In order to sustain subscriber growth and reduce churn, Dish Network will need to spend a lot more on Blockbuster’s content and focus on subscriber quality. In addition, introducing more HD channels and a successful execution of its plans for wireless broadband will help.
Legal Disputes Settled
The biggest legal dispute that Dish Network was involved in 2012 was with AMC Networks. In 2005, Dish signed a 15-year deal to carry Voom, and it also acquired a 20% stake in the business. Voom was a package of 21 HD networks owned by AMC, which was a subsidiary of Cablevision then. However, in 2008, Dish terminated the contract which led to Cablevision suing Dish. In its defense, Dish stated that it terminated the contract because Cablevision did not comply with the annual $100 million spending requirement for Voom. AMC and Cablevision stated the opposite, citing support from audit results.
AMC, which spun off from Cablevision in 2011, was seeking $2.4 billion in damages. Given the scale of the potential financial impact, this case was critical for Dish. However, the company settled the case, as we had expected, for a much smaller amount of $700 million.  The contract with AMC was renewed and thus Dish Network prevented further customer dissatisfaction.
Spectrum Gamble Played Out
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 playing its cards and has acquired spectrum assets from TerreStar and DBSD North America. Dish has been smart in its approach, realizing that even if it cannot build its own wireless network, it can at least sell the spectrum for a substantial profit. The company’s gamble paid out as the FCC recently granted permission to Dish to build a ground-based wireless network in the U.S. As a result, the spectrum’s valuation has skyrocketed to $12 billion. 
Dish has the option to sell its spectrum for a huge profit and invest the proceeds in its current business. This profit could be substantial enough to be invested in new satellite launches or increasing their capacity to support future HD programming. Additionally, the investment could be made in Blockbuster’s content to make it more lucrative to subscribers. This can help the company improve the value of its service and better compete with bundled service providers such as the cable and telecom companies. However, it is more likely that Dish will partner with another company and roll out nationwide wireless data services. Several companies including Sprint (NYSE:S) have shown interest in this.
Hopper DVR Introduced In Viewers’ Interest
Dish Network again got into spotlight and court rooms in 2012 due to its introduction of Hopper DVR. This DVR allows for automatic ad skipping and recording of primetime shows from big broadcasting networks. This agitated the broadcasters who filed a case against Dish. Primetime viewership and ad pricing are much higher than those for the rest of the day and therefore a notable portion of broadcasting revenue can be attributed to it.
However, from Dish Network’s point of view, this move made sense as it increased customer convenience and flexibility and provided the company a competitive advantage. The features provided by Hopper DVR are not default features and a viewer has to engage with the system to record prime time shows and watch them ad-free. Although this DVR makes it easier for the viewers, they can perform similar functions with any normal DVR. Dish did not do anything new; it rather made it easier and more explicit. The whole point was about enhancing overall user experience and Hopper DVR is an experiment in that direction.
What To Expect In 2013
2013 will be all about Dish Network’s progress in building its wireless service. The intent is to take advantage of the growing demand for data as well as use this new service to offer pay-TV and broadband bundles that could make Dish more competitive. The company might start off with pilot programs in certain regions in 2013 as it continues to build its wireless capability. We also expect a fresh infusion of funds for content and marketing of Blockbuster. It appears that Dish hasn’t really been aggressive with the promotion of Blockbuster and is still figuring out how to make its physical stores profitable. The delay in FCC approval has hampered Dish’s plan to sell Blockbuster streaming capable devices that would have worked on its own wireless network. However, with the approval now granted, we expect Dish to start working more aggressively on improving its Blockbuster streaming service.
Additionally, as the time period of frozen prices is ending, we expect Dish to increase prices in 2013. This is going to be an important move as the lack of price increases has hurt Dish Network’s revenue growth in 2012. Its rival companies, including both cable and satellite pay-TV service providers, have resorted to price hikes to protect margins against rising programming costs.
Our price estimate for Dish Network stands at $36.20, roughly in-line with the market price.Notes: