Dish Network (NASDAQ:DISH) recently reported its earnings for Q1 2013. While the subscriber-related revenue grew by 4% due to a 3% increase in the pay-TV ARPU (average revenue per user), overall revenues remained flat due to the weakness in Blockbuster movie rental business. Unlike Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) where pay-TV customer churns exceeded the gross additions, Dish continued to add more subscribers. Higher set-top box related costs weighed on the earnings as the company’s subscriber-related expenses increased by 8.5%.
Going forward, the company’s valuable spectrum and its entry into wireless will be the key growth drivers. Dish Network sees value in bundling wireless services as it struggles for growth in the competitive U.S. pay-TV market.
Limited Growth In The Pay-TV Market
The increased usage of smartphones and tablets in the U.S. has caused a shift in customer’s preference to stream video and television content on multiple devices. In order to keep up with the demand, Dish has introduced a new Hopper box that can send television content to tablets. The Hopper has been a very successful feature and allows customers to watch commercial free recorded programs.
Dish added 36,000 pay-TV subscribers in its first quarter, which is lowest in the past four years.  However the company still did better compared to MSOs (multi-service operators) and other cable based operators who have been losing their pay-TV customers to satellite and telcos. However, companies such as Comcast and Time Warner Cable have been aggressive to address the issue and have come up with advanced technological features to retain existing customers and lower churn. We expect these companies to turn around their subscriber losses which will impact the market share of satellite based operators such as Dish and DirecTv.
Dish owns some valuable assets in the form of spectrum, which it has acquired in the past couple of years. The company’s management has been very open about its wireless ambitions and last month it made a $26 billion bid to acquire wireless carrier Sprint. 
The company wants to compete better in the saturated U.S. pay-TV market by offering a viable bundling option where it can combine its satellite service and wireless spectrum licenses with Sprint’s wireless capabilities. It is clear that Dish will pursue its wireless ambitions regardless of the outcome with Sprint. We believe that acquiring Sprint could be a good strategic move for Dish, albeit an expensive one. At the same time, we also believe that going forward a bundling option could be something that will drive growth for Dish.
We are currently in the process of updating our model for Dish Network in the light of recent earnings.
Our price estimate for Dish Network stands at $38, roughly in line with the market price.Notes: