How Are Dish’s Pay-TV Operations Trending?

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Dish Network‘s (NASDAQ:DISH) pay-TV operations contribute close to 40% to the company’s value according to our estimates. The pay-TV industry at large has been facing headwinds, primarily due to the rise of alternative video platforms such as Netflix (NASDAQ:NFLX), Amazon Prime and Hulu. However, satellite companies such as Dish and DirecTV (NASDAQ:DTV) have been adding subscribers in the U.S., while cable companies such as Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) have been losing market share over the past few years. This can be attributed to the delay in transition to a digital platform, which led cable customers to move to satellite and telcos. Dish in particular, has benefited from its advanced DVRs such as AutoHop, which skips the commercials while recording a program.

However, we believe that Dish will face the heat from the rise of alternative video platforms in the long run. Netflix has already gained a large number of subscribers in very less time. It now provides services to more than 30 million customers in the U.S. [1] Dish has stated that there will be a decline in pay-TV industry and has plans to build a wireless network across the U.S. for future growth. We forecast Dish’s pay-TV market share to decline slightly over the next few years to 12.4% as compared to 13% currently. Dish has over 14 million subscribers and charges an estimated $62 monthly subscription fee, earning annual revenues of over $10 billion. [2] The estimated gross profit margin of 45% for its pay-TV business translates into profits of over $4 billion, representing 75% of Dish’s overall profits for 2013.

 

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Dish’s Pay-TV Market Share Will Decline Over the Next Few Years

The satellite company has managed to hold on to its subscriber base of 14 million for the past few years. Dish’s pay- TV subscribers went up from 13.1 million in 2006 to 14.1 million in 2009. [2] However, since 2009, the subscriber growth has been stagnant. This can be largely attributed to a combination of market saturation, fierce competition, and the increased focus of providers on acquiring higher-value subscribers. Moreover, some consumers opt for a lower-cost mixture of over-the-air TV and other over-the-top viewing options. While some customers went away from Dish, some opted for its pay-TV services. Dish has benefited from its unique AutoHop DVR as well as its promotional offers, which has offset the decline in subscriber base.

We estimate that the market share will decline slightly and be a little over 12% by the end of our forecast period. This will take the company’s subscriber base to around 14.2 million, reflecting a marginal increase from the current levels. We don’t expect a significant rise in the subscriber base due to the continued growth of alternative video platforms.

Subscription Fee Will Continue To Rise Over Higher Programming Costs

While the company’s subscriber base has been stagnant over the past few years, the average monthly subscription fees (ARPU) has been on an uptrend. The ARPU has increased from $52 in 2007 to an estimated $62 in 2013. Programming costs have risen annually due to the periodic increases in the carriage fee for various channels, which are a critical part of the multi-year agreements between media companies and pay-TV service providers. For instance, Dish had a tough time negotiating with Disney (NYSE:DIS) for renewing the latest programming deal (Read More – Disney And Dish Ink First Of Its Kind Programming Deal; Dish To Disable AutoHop Feature) Dish even considered dropping ESPN if the deal wouldn’t have gone through. [3] In order to protect margins, the pay-TV companies typically increase prices periodically and thus subscribers bear the burden of increased programming costs. We expect this trend to continue and drive average subscriber fees up. We estimate that ARPU will continue to grow at the historical average growth rate of 3%, translating into ARPU of $76 by 2020. The growth in ARPU will drive the pay-TV revenues higher from $10.45 billion in 2013 to $13.02 billion towards the end of the decade.

It must be noted that there could be more than 10% upside to our price estimate if the company manages to raise the subscription prices at a higher pace and take ARPU above $95 by the end of our forecast period. Similarly, there could be 5% downside to our price estimate if the company is unable to pass on the costs to customers and ARPU remains range bound around $70 levels towards the end of our forecast period.

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Notes:
  1. Netflix’s SEC Filings []
  2. Dish Network’s SEC Filings [] []
  3. Will Dish Dump Disney Over ESPN?, Trefis, Sep 10, 2013 []