Dish Network Q3 Earnings Preview: Watchout For Pay-TV Subscriber Trends
Dish Network (NASDAQ:DISH) will report its Q3 2014 results on November 4t. We are eager to learn the pay-TV subscriber trends in the quarter. In the prior year period, the company added 35,000 video subscribers. The monthly subscription fee (ARPU) has also been on an uptrend over the past few quarters moving from $80.90 in June 2013 to $84.15 in June 2014. [1] While these factors have been driving the pay-TV revenues for the company over the past few years, over the last four quarters, revenue has fallen an average of 2% year over year as the company added fewer subscribers. However, we believe that the revenue will grow in the near term, driven by higher ARPU as the company periodically increases package prices to match incremental increases in programming costs. Accordingly, we estimate ARPU (as reported by Dish) will grow to over $84 during the third quarter as compared to $81 in the prior year period. We will look for confirmation with the release of earnings.
It must be noted that Dish blacked out Time Warner’s (NYSE:TWX) cable networks including CNN and Cartoon Network to its subscribers after failing to reach a negotiation with the media house. This may have an adverse impact on the subscriber statistics for the fourth quarter.
Looking at wireless, Dish submitted its application for bidding in the upcoming AWS-3 spectrum auction. The November auction is important for companies such as Dish, as it would give a clear picture of the value of the existing spectrum held by the telecom operators. It is possible that the AWS-3 auction will raise the value of spectrum currently held by the wireless operators. We currently estimate Dish’s AWS-3 spectrum value to be around $22 billion, reflecting 47% of the company’s stock value. We will update our model after the November auctions to incorporate the latest market value of the spectrum. We will be looking for further updates on November auction from the management in its quarterly earnings call.
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See our complete analysis for Dish Network
Satellite TV Operations Will Be In Focus
We estimate that the satellite TV operations contribute close to 40% to Dish’s value. The company has managed to add pay-TV subscribers over the past few years despite a slowdown in the industry. This can be attributed to the popularity of its advanced AutoHop DVR, which skips commercials while recording, and the advantages of satellite TV, which is available in rural areas, where cable operators do not provide services. We believe these factors will continue to drive subscriber growth for the company in the near term. Moreover, growth in pricing will translate into higher pay-TV revenues for the satellite company.
However, the fourth quarter could be challenging for the company as it has dropped 8 of Time Warner’s cable networks including CNN, Adult Swim, Cartoon Network and truTV. The networks are unavailable to 14 million households. The contract between the two companies ended in June and got multiple extensions but the talks failed last month over the issue of time distance between smaller and larger networks. Dish wants to maintain the time distance while Turner wants it to be closer. [2] It must be noted that TNT and TBS are not impacted by this dispute as they are provided to Dish under a separate contract. While the blacked out networks do not command high ratings, Dish may still feel the pinch if some of the subscribers vent out their frustration by choosing another pay-TV operator.
Moreover, there is an increased competition from other pay-TV operators primarily on bundling of services. While Dish offers broadband and pay-TV bundle in partnership with other operators such as Frontier Communications, its bundled offering is mainly useful for rural areas. In urban markets, it still pales against the value of bundled offering from cable companies such as Comcast (NASDAQ:CMCSA) and telcos such as AT&T (NYSE:T). These factors will weigh over the company’s pay-TV operations in the long run and accordingly we estimate Dish’s pay-TV market share to drop from 13% currently to a little over 12% towards the end of our forecast period.
Also, Dish’s current carriage deal with CBS Corporation (NYSE:CBS) will end in November. Currently both the companies differ on financial terms to extend the deal. While the price of CBS’ TV stations was 54 cents per subscriber when the current deal was signed in 2012, the current pricing is around 89 cents, according to SNL Kagan. [3] It must be noted that CBS being the most watched network have an upper hand in such negotiations, evident from the 2013 deal with Time Warner Cable (NYSE:TWC). The cable company’s Q3 2013 results were devastated after it blacked out CBS and more than 300,000 subscribers switched cords to vent out their frustration. It will be interesting to see how this story develops over the next few weeks and if Dish does decide to take CBS head on in negotiations.
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- Dish Network’s SEC Filings [↩]
- Will Time Warner Feel A Bruise From Its Battle With Dish Network?, Deadline, Oct 21, 2014 [↩]
- Dish far apart on contract as deadline nears-source, Reuters, Nov 2, 2014 [↩]