Who is doing better this year, DirecTV (NASDAQ:DTV) or Dish Network (NASDAQ:DISH)? Our answer is Dish for the first half of 2012 but that view has changed now. It appears that even though Dish got off to a good start, its weakness has been exposed and there are some persisting issues troubling the company. DirecTV is doing better on revenue growth as well as subscriber additions. There are certain advantages that DirecTV enjoys and Dish will need to do a lot better with its newly acquired Blockbuster and wireless assets to challenge the former.
See our complete analysis for DirecTV
Dish Network’s Stock Performance Has Been Better
While DirecTV’s stock has risen by less than 20% this year, Dish Network has grown by more than 30%. There is a staggering difference between the two companies as far as their stock performances are concerned. This can be attributed to some of the initiatives taken by Dish including the acquisitions of Blockbuster, Terrestar and DBSD North America. Blockbuster was both a strategic and tactical move which led to subscriber additions in Q4 2011 and Q1 2012. The acquisition of wireless spectrum (Terrestar and DBSD) was a strategic move to strengthen Dish’s competitive position in the long term.
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The market rewarded these developments favorably while considering Dish’s settlement of its legal dispute with VOOM as a positive development. DirecTV’s stock has seen stable and steady growth in the U.S. and fast growth in Latin America. However, growth in Latin America accompanies certain risks such as high capital expenditure that may or may not pay off in the long run due to the potential of increased competition and lower subscriber stickiness. We believe these risks have moderated DirecTV’s stock price growth.
DirecTV Started Off Mediocre But Has Picked Up In Subscriber Additions
Dish acquired Blockbuster last year and launched its streaming service in Q4 2011. This helped it turn around its subscriber losses and it continued this improvement in 2012 as well. In the first quarter of 2012, Dish gained net 104,000 subscribers compared to 81,000 for DirecTV.  This was a surprising achievement given how the company had struggled in the previous quarters. A majority of this can be attributed to customer enthusiasm towards Blockbuster streaming service as well as Dish’s focus on improving the credit quality of its subscriber base.
As the year progressed, Dish’s weakness became more apparent. Even though the company lost only 10,000 subscribers in seasonally weak Q2 (less than DirecTV’s loss of 52,000 subscribers), its monthly subscriber churn increased substantially to 1.60% compared to 1.35% in Q1.  In comparison, DirecTV’s churn increased only from 1.44% to only 1.53%.  This shows DirecTV’s fundamental strength in weak and unfavorable conditions and demonstrates that Dish Network still needs to work a lot more to improve its subscriber quality.
As far as Q3 2012 was concerned, DirecTV outclassed Dish Network by a good margin. While Dish lost 19,000 net subscribers, DirecTV gained 67,000 net subscribers.  DirecTV seems to be picking up and has gained more net subscribers than Dish in the first nine months of 2012. Additionally, its churn has averaged lower than that of Dish Network.
DirecTV’s Programming & Distribution Advantage Is Helping It
DirecTV has a greater number of HD channels with more emphasis on sports compared to Dish Network.  HD and sports channels cost more and thus attract subscribers who have a good spending capacity. This, in turn, lowers the churn as DirecTV can market additional services such as whole-home-DVR to these customers, and they tend to stick. Until last year, DirecTV spent about $1 billion a year on NFL programming, making its flagship NFL Sunday Ticket out-of-market sports programming package available to its subscribers. This has been a unique selling point for the company. Out-of-market sports programming enables viewers to watch games of teams that are not local to their area of residence.
In addition to programming advantage, DirecTV also has a distribution advantage. Dish Network lost its key distribution partners such AT&T (NYSE:T) and CenturyLink to DirecTV in the past.
Dish Network Is Struggling With ARPU Growth
Unlike DirecTV and other pay-TV players, Dish Network decided to freeze its prices until 2013 to have a competitive advantage. However, it seems that this hasn’t helped much and has in fact put a lot of pressure on revenue and margin growth. Despite more customers opting for HD and DVR services, Dish Network’s revenue seems to be heading for a mere 2% growth for the full year 2012. We estimate that fee per subscriber for conventional satellite-TV programming packages (excluding HD/DVR) for Dish network has remained stagnant at around $58 for 2012. In comparison, the same figure for DirecTV has grown from $67 in 2011 to $69 in 2012. DirecTV is charging more and is also increasing those charges every year while maintaining subscriber growth. We believer this is the winning formula.
Our price estimate for DirecTV stands at $58, implying a premium of more than 15% to the market price.Notes: