Factors That Could Potentially Trigger A Decline In Dish’s Stock Price

April 9th, 2015 by Trefis Team
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DISH Network

Dish Network (NASDAQ:DISH) is the second largest satellite pay-TV provider in the U.S. The company’s subscriber base stood at 13.98 million by the end of 2014. Dish lost 79,000 subscribers in 2014, whereas the company had added net subscribers in the 2 years before. This was largely due to programming interruptions which stemmed from disputes with content providers such as 21st Century Fox (NYSE:FOX) and Time Warner (NYSE:TWX). All these disputes are part of a larger dispute with content providers to limit programming costs and such instances can continue to occur in the future. As our base scenario, we believe that Dish will lose subscribers in the coming years, albeit at a reduced pace. The company will be able to increase its revenues by increasing its subscription rates periodically.

Dish has also made significant investments in spectrum over the past few years and the company is now the fifth largest holder of wireless spectrum in the United States. The spectrum provides Dish with a number of options, such as launching its own nationwide wireless network, partnering with an existing wireless carrier and either leasing or selling the spectrum. We believe that Dish will be able to suitably monetize its spectrum, whichever plan it chooses.

Our price estimate for Dish stands at $79.8, implying a premium of about 12% to the market. However, there are certain triggers and plausible developments that can move the stock significantly in the next couple of years. Specifically, we believe that Dish’s failure to suitably monetize some of its spectrum assets and a rapid erosion of the overall pay-TV subscriber base are some of the key plausible events that can trigger a downward revision to our price estimate.

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Dish Fails To Efficiently Monetize AWS-4 Spectrum (~20% Downside)

Dish currently owns licenses to more than 80 Megahertz (MHz) of spectrum, including 40 MHz of AWS-4 spectrum, 10 MHz of H-Block spectrum and 25 MHz of AWS-3 spectrum. [1] We estimate the pre-tax fair value of Dish’s spectrum holdings to be around $39 billion. The AWS-4 band is adjacent to and can be paired with H Block spectrum, which is highly desirable. Another desirable aspect is that the band covers every territory in the United States. However, it is subject to certain interim and final build-out requirements by the Federal Communications Commission (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. [1] Dish’s license authorization can be terminated in each area it fails to meet these build-out requirements. However, Dish has not even begun building out its coverage in any of these areas as of now.

The company’s best bet of reaching these build-out requirements is to partner with a carrier already having an operational network. However, Dish failed in its earlier attempts to acquire a telecommunications company when the company made unsuccessful attempts to acquire Sprint (NYSE:S) and Clearwire. [2] [3] There has been considerable speculation over the past few years about which carrier Dish will acquire to get its operations up and running, the most recent linking Dish to T-Mobile.  However, it remains to be seen whether a deal will materialize. [4] Meanwhile, the build-out requirement dates for the spectrum continue to inch nearer.

We currently believe that the AWS-4 spectrum’s fair value is nearly $22.4 billion at $1.73 per MHz-Pop. (See our method of calculation – Dish Network Price Estimate Revised To $79.80 Based On Spectrum Valuation) If Dish fails to reach a deal and does not develop its own network, there might come a time when the FCC clock runs out for Dish. In that scenario, the company might have to sell at a huge discount or even worse, completely relinquish the spectrum to the FCC. If Dish is forced to sell its spectrum at around $1.00 per MHz-Pop, it will purse around $13 billion from the transaction. Consequently, the price estimate for the company would then come down to $64, implying a downside of approximately 20% to our current estimate of $79.80.

Pay-TV Subscriber Losses Could Accelerate Rapidly (~10% Downside)

Pay-TV market has become saturated over the past few years. Even though total TV households in the U.S. have inched upwards, increasing from 114.2 million [5] in 2012-13 to 116.3 million [6] in 2014-15, the pay-TV subscriber number has remained stagnant at around 100 million for the past few years. [7] Top pay-TV providers are currently losing a combined 100,000+ subscribers per year, having lost around 105,000 [8] and 125,000 [7] subscribers in 2013 and 2014, respectively. This rate of erosion in their subscriber base has allowed the pay-TV providers to remain profitable as the loss of subscribers is more than offset by rising subscription fees. In our base scenario, we believe that the pay-TV subscriber base will shrink by 100,000 subscribers every year and just dip below 100 million by the end of our forecast period, resulting in a pay-TV penetration of just under 85%.

However, the rate of erosion of subscriber base could potentially accelerate to a point where the pay-TV industry might lose more than one million subscribers per year. TiVo recently released a white paper which estimates that approximately 1.5 million customers plan to cut the cord of their pay-TV service. The rise of alternative platforms, such as online streaming services, can also hasten the subscriber losses for the pay-TV industry. Streaming giant Netflix already has a thriving subscriber base and other content providers such as Sony, Apple, HBO, CBS, etc., are also launching their own streaming services. These services will be priced considerably lower than the subscription fees charged by traditional pay-TV providers. This could lead to a mass exodus and the pay-TV market could drop down to 90 million in the next six to seven years, resulting in a pay-TV penetration of around 75%. This turn of events will also have a negative effect on the Dish’s market share, which could potentially drop below 12%. The company will also not be in a condition to raise prices as it will be competing against cheaper streaming alternatives. All these developments could bring down Dish’s price estimate to $72.20, which would be close to a 10% correction to our current estimate of $79.80.

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Notes:
  1. Dish’s SEC Filings [↩] [↩]
  2. Dish Billionaire Ergen Lets Sprint Go To SoftBank And Its Billionaire CEO, June 19, 2013, Forbes [↩]
  3. Dish bows out of battle with Sprint over Clearwire, Jun 26, 2013, Reuters [↩]
  4. T-Mobile CEO Says a Deal With Dish Network Would Make Sense, February 27, 2015, TheStreet [↩]
  5. NIELSEN ESTIMATES 115.6 MILLION TV HOMES IN THE U.S., UP 1.2%, May 7, 2013, Nielsen [↩]
  6. NIELSEN ESTIMATES 116.3 MILLION TV HOMES IN THE U.S., UP 0.4%, May 5, 2014, Nielsen [↩]
  7. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group [↩] [↩]
  8. Major Multi-Channel Video Providers Lost About 105,000 Subscribers in 2013, March 14, 2014, Leichtman Research Group [↩]