Dish Network (NASDAQ:DISH) competes with satellite pay-TV providers like DirecTV (NASDAQ:DTV), cable companies like Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC), and telecom operators like AT&T (NYSE:T) and Verizon (NYSE:VZ). The company recently released its earnings and, due primarily to improved margins primarily, we have updated our price estimate for Dish Network’s stock to $27.77. Our price estimate stands at a premium of roughly 20% to market price.
Full-Year 2010 Results
We estimate that gross margins for the company’s most valuable segment, satellite TV, improved by 110 basis points, reaching 48% for 2010. The company also saw improvements in subscriber retention costs that spurred improvement in SG&A (as % of gross profits). We estimate that this figure improved from 50.6% in 2009 to 48.3% in 2010. Given increasing competition, however, we are cautious regarding Dish Network’s ability to maintain these margins.
Despite these improvements, Dish Network saw stunted subscriber growth. The company only gained about 33,000 net subscribers in whole of 2010 compared to over 660,000 net subscriber gains for DirecTV. [1] This small growth could be partly attributed to the company’s lack of aggressive pursuit of new subscribers, as it instead focused on improving its financial position.
Price Increase for Core Programming Packages
One of the more interesting recent moves by the company, and something given quite a bit of attention as the company released earnings, was its decision to enact a flat price increase for its core programming packages. This will lead to higher average revenue per user in 2011, a key driver to Dish Network’s stock value.
What is the strategic incentive behind this decision?
See our full analysis and $27.77 price estimate for Dish Network
Pricing Strategy
Dish Network has decided to enact a flat price increase for 2011, and will subsequently freeze prices for at least 2 years. This might seem like an odd strategy, given that Dish hasn’t been too successful in sparking demand from new subscribers and the economy is proving slow to recover from the recent recession. However, the rationale behind this price rise could fall within Dish Network’s available room to raise prices, observations from DirecTV’s success, an increased focus on improving financial metrics and pressure from content owners concerning higher carriage fee demands.
The company commented that consumers pay 20% more to competitor DirecTV than they pay to Dish, a situation that provides room for Dish to experiment with higher pricing. [2] This initiative is related to Dish’s effort to emphasize high-quality subscribers that are likely to yield more returns to the company in the long-term. This is quite similar to DirecTV’s recipe of success, as DirecTV is widely perceived to have a more affluent subscriber base.
The price increase does, however, create further uncertainty regarding Dish Network’s subscriber growth going forward. The company hopes that freezing prices for two years will help to control the churn, [2] however we remain cautious and maintain a conservative view on Dish Network’s market share outlook.
