Dish Q2 Preview: Focus On Shrinking Pay-TV Subscriber Base, Future Spectrum Auction Strategy And Sling TV

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Dish Network (NASDAQ:DISH) will report its second quarter results on August 5. [1] We expect the company’s pay-TV subscriber base to continue to shrink in the near term. The decline in the subscriber base will be offset by the growth in ARPU, and the growth in ARPU will translate into higher pay-TV revenues for the satellite company. We estimate that Dish’s pay-TV subscriber base will be around 13.76 million for the year 2015, while overall pay-TV revenues will be around $10.5 billion. We are also looking forward to hearing from the company management on their future spectrum acquisition plans in light of the recent proposed changes to the auction rules. Additionally, we will also be looking out for an update on Sling TV, Dish’s $20-a-month streaming service which was launched in January.

See our complete analysis for Dish Network

Subscriber Base Will Shrink, ARPU Will Grow

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We estimate that the satellite TV operations contribute close to 30% to Dish’s value. The company has managed to maintain its pay-TV subscriber base over the past few years despite a slowdown in the overall pay-TV industry. This is partly due to satellite TV’s reach in rural areas, where cable operators find it difficult to provide services. Dish has also benefitted from the popularity of its advanced AutoHop DVR, which skips commercials while recording. However, we believe that the decline in the pay-TV industry has caught up to Dish. The company has consistently lost subscribers since Q1 2014 and lost a whopping 134,000 subscribers last quarter. [2] We believe that Dish will continue losing subscribers on a regular basis in the coming years. Consequently, we believe that Dish’s pay-TV market share will come down from 14% in 2014 to around 12.5% by the end of our forecast period.

Cable companies have been effectively offsetting their video subscriber declines by selling high-speed Internet services, but satellite-TV providers such as Dish have not been able to follow suit because of speed constraints in satellite-based Internet. Resultantly, Dish has not been able to efficiently bundle its 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. The urban markets are primarily dominated by the bundled offerings from cable companies such as Comcast (NASDAQ:CMCSA) and telcos such as AT&T (NYSE:T), while Dish’s services pale in comparison. The growing availability of online content on alternative video platforms such as Netflix (NASDAQ:NFLX), Hulu, Sling TV, HBO Go, etc., also poses a competitive threat to the whole pay-TV industry. Dish’s satellite-TV rival DirecTV DirecTV (NASDAQ:DTV) has merged with AT&T which will allow it to offer bundled services. However, Dish has no such merger partner as of now. The company will need to compensate the loss of subscribers by increasing ARPU. The growth in ARPU will translate into higher pay-TV revenues for the satellite company. Consequently, we believe that Dish’s Fee per satellite-TV Subscriber will increase from $61 in 2014 to around $77 by 2021.

Watch Out For Updates On:

Dish’s Plans For Future Spectrum Auctions

Dish has made significant investments in spectrum over the past few years and currently owns licenses to more than 80 Megahertz (MHz) of spectrum. We estimate that Dish’s spectrum holdings have a pre-tax fair value of around $39 billion and constitute 61% of Dish’s stock value. However, Dish might find it relatively difficult to acquire spectrum in future FCC auctions once the FCC Chairman Tom Wheeler’s proposed changes to current spectrum auction policies are approved. Wheeler is bringing in greater transparency and a cap on bidding credits with regards to the small businesses program, the same program Dish effectively used in the last auction to secure a discount of nearly $3 billion. As a result, Dish will now have to compete on equal footing with cash-rich AT&T and Verizon and will find it difficult to mobilize finances. (Read more – Dish Might Find It Harder To Acquire Future Spectrum, Limiting Stock’s Potential Upside) Additionally, the FCC is poised to cancel the earlier mentioned discount Dish received during the last auction, and the company will then have to pay an additional $3.3 billion to the commission. (Read more – FCC Cancelling Dish’s Auction Discount Would Lead To A 9% Correction In Our Price Estimate)

Wheeler also seems content with the current size of the spectrum kept in reserve for smaller players. This is another setback to Dish as the company has been lobbying the FCC to increase the size of the spectrum reserve, arguing that AT&T and Verizon will continue to dominate the wireless industry if the smaller players are starved of the required spectrum. [3] We believe that Wheeler’s proposed changes will be approved and Dish’s earnings call will give us a better idea of how the company management plans to go about acquiring spectrum at next year’s incentive auction and beyond once the new rules take effect.

Sling TV Online Streaming Service

We will be listening closely to what Dish’s management has to say on the progress of Sling TV. Dish’s new streaming service is primarily targeted at the millennial audience and 10.6 million broadband-only subscribers and was launched in January. [4] Sling TV’s base package is priced at $20 per month and offers a good mix of popular sports channels such as ESPN and ESPN2, as well as entertainment channels such as AMC, TNT, Disney Channel etc. [5] The service also offers various paid add-ons depending on consumer preferences. The service has witnessed encouraging adoption and currently has around 250,000 paying subscribers. [6] However, Sling’s adoption levels are nowhere near industry leader Netflix’s. Dish is also working very hard to improve the content and consumer experience in order to enhance the popularity of the streaming service. However, some concerns still plague the Sling TV streaming service. (Read in detail – Dish’s Sling TV Off The Blocks Quickly, But Still Has A Long Road Ahead) We believe that the service could witness good adoption rates going forward. If Sling manages to capture around 40% of its targeted market, it can generate around $1 billion in revenues for Dish.

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Notes:
  1. DISH Announces Conference Call for Second Quarter 2015 Financial Results, Dish Network Press Release []
  2. Dish Network’s SEC Filings []
  3. T-Mobile, Sprint and Dish push for 40 MHz spectrum reserve in 600 MHz auction, March 25, 2015, FierceWireless []
  4. Dish Network Unveils Sling, a Streaming Service to Rival Cable (and It Has ESPN), The New York Times, Jan 5, 2015 []
  5. Sling TV: Everything you need to know, January 20, 2015, cnet.com []
  6. Sling TV’s Web TV Subscriber Numbers Keep Growing, Now Around 250,000, June 5, 2015, re/code []