Dish Q3 Earnings: CEO Believes Any Spectrum Deal Before January Less Likely, Sling TV Reduces Pay-TV Subscriber Losses

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Dish Network (NASDAQ:DISH) released its Q3 2015 earnings report recently. [1] Dish’s CEO stated that forfeiting part of the company’s AWS-3 spectrum in lieu of the cancelled $3.3 billion spectrum discount was a good decision, as it leaves most of the company’s options still open in terms of how they want to use their spectrum. He also added that it was less likely that the company would enter into any sort of spectrum deal before the FCC’s January 2016 auction deadline. Even though Dish seems more concerned about making sure that it chooses the most optimal option when it comes to monetizing its spectrum holdings, the company also needs to be mindful of the FCC’s March 2017 interim build-out requirement imposed on its AWS-3 spectrum. As for Dish’s pay-TV business, the subscriber base continued to shrink, but growth in ARPU translated into marginally higher pay-TV revenues for the quarter. Additionally, the company has started including Sling TV metrics into its reported pay-TV numbers, and the net subscriber adds of Sling TV has helped reduce the rate of decline in the pay-TV subscriber base.

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Dish Still In Wait-And-See Mode Regarding Monetizing Its Spectrum, But Needs To Keep An Eye On Build-out Requirement Deadlines

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Dish CEO Charlie Ergen maintained that they have not finalized any plans regarding how they want to monetize their spectrum holdings. Ergen had stated on an earlier earnings call that the cancellation of the $3.3 billion discount Dish received in the AWS-3 spectrum auction might derail future plans. [2] However, instead of paying the amount, Dish decided to relinquish $3.4 billion worth of its AWS-3 spectrum to the FCC. [3] Ergen now believes that forfeiting the spectrum was a good decision, as it leaves most of the company’s options still open in terms of how they want to use their spectrum. [4] He also stated that it was less likely that Dish would enter into any sort of spectrum deal before the FCC’s incentive auction deadline in January. Once the deadline passes, the FCC will not allow any spectrum related transactions until the incentive auctions have been conducted. Ergen also remained tight lipped about the progress of a potential spectrum leasing deal with Verizon (NYSE:VZ). However, he did state that Dish’s sizeable spectrum holdings can be strategically beneficial to certain companies and these companies will find it hard to ignore Dish’s spectrum. Verizon CEO Lowell McAdam had claimed last month that the telecom giant has had talks with Dish about a partnership which could lead to Verizon using Dish’s spectrum in exchange for providing Dish with wireless capacity. [5]

Dish’s current stance leads us to believe that the company is in no hurry to start making money off of its spectrum investment. Dish is more concerned about making sure that it chooses the most optimal option when it comes to monetizing its spectrum holdings. However, Dish’s AWS-4 spectrum licenses are subject to certain interim and final build-out requirements by the 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. [6] Dish’s license authorization can be terminated in each area it fails to meet these build-out requirements. The company has not even begun building out its coverage in any of these areas as of now. If Dish fails to reach a spectrum related deal by the FCC’s January 2016 incentive auction deadline, it can only resume negotiations after the final results of the auction are announced. By that time, we will be well into 2016 and Dish’s March 2017 interim build-out requirement deadline will have inched ever so closer. The company will have a limited amount of time, and if it fails to reach a deal which puts its spectrum to use, the FCC’s clock may run out. In that scenario, the company might have to sell at a huge discount or even worse, completely relinquish the spectrum to the FCC.

Pay-TV Segment Continues To Lose Subscribers, But Sling TV Lessens The Blow

Dish’s pay-TV business saw anemic growth during the quarter, mostly on the back of higher ARPU. The subscriber-related revenues increased 1.5% to $3.7 billion for the July-September period. [7] The company lost 23,000 video customers while reported average revenue per user (ARPU) grew 2.3% to $86.33 for the quarter. [7] Dish would have lost more video subscribers had it not been for its online streaming service, Sling TV. The company has started including metrics of Sling TV into its reported pay-TV numbers since Q2 and the net subscriber adds of Sling TV has helped reduce the rate of decline in the pay-TV subscriber base. However, this has also capped the growth in ARPU as the service’s base package is offered at a considerably cheaper $20 a month. Dish’s management believes that Sling TV is well poised to take advantage as consumers increasingly shift to alternative platforms in order to consume content. The company management has previously stated that their immediate goal is to keep the service attractively priced in order to gain more subscribers. [8]

The pay-TV market has become increasingly saturated and pay-TV companies have lost thousands of customers over the past few years. The availability of content on online streaming platforms such as Netflix (NASDAQ:NFLX), Hulu, HBO Go, etc., is encouraging traditional pay-TV subscribers to shift to such platforms. In such a scenario, offering Sling TV at competitive pricing is a good strategy for Dish, as it will help the company in reducing the pace of decline in its traditional pay-TV subscriber base. Accordingly, we believe that Dish will continue to lose pay-TV subscribers throughout our forecast period, albeit at a slower pace.

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Notes:
  1. DISH Network Reports Third Quarter 2015 Financial Results, November 9, 2015, Dish Network Press Release []
  2. DISH Network (DISH) Charles William Ergen on Q2 2015 Results – Earnings Call Transcript, August 5, 2015, Seeking Alpha []
  3. DISH Statement on AWS-3 Spectrum, October 01, 2015, Business Wire []
  4. DISH Network (DISH) Charles William Ergen on Q3 2015 Results – Earnings Call Transcript, November 9, 2015, Seeking Alpha []
  5. What Telecom CEOs Are Saying: Highlights from Goldman Sachs Conference, September 18, 2015, Wall Street Journal []
  6. Dish’s SEC Filings []
  7. Dish Network’s SEC Filings [] []
  8. Dish Network’s (DISH) CEO Charlie Ergen on Q1 2015 Results – Earnings Call Transcript, May 11, 2015, Seeking Alpha []