Weekly Pay-TV Notes: AT&T-DirecTV Merger Review Set To Resume After Related Court Case Resolved; Dish Announces Q1 Results

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The pay-TV industry saw significant activity this week, with an Appeals Court throwing out an FCC order which stated that media houses will share sensitive information about pay-TV carriage contracts as part of the commission’s review of pending cable and telecom mergers. The FCC had paused the review of the AT&T-DirecTV deal pending this ruling and should resume its review shortly. On a separate note, Dish Network released its quarterly earnings reports during the week. The company’s pay-TV business saw steady growth in the first three months of 2015, driven by higher ARPU’s. On that note, we discuss below these developments related to the pay-TV companies over the past few days.

AT&T-DirecTV Merger Review Set To Resume After Appeals Court Decision

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The U.S. Court of Appeals for the District of Columbia Circuit has thrown out the Federal Communications Commission’s (FCC) order that media houses should share sensitive information about pay-TV carriage contracts as part of the commission’s review of pending cable and telecom mergers. [1] This ruling may allow the FCC to formally restart its review of the proposed merger of DirecTV (NASDAQ:DTV) with AT&T (NYSE:T). The commission had earlier stopped the review of the AT&T-DirecTV deal along with the now-defunct Comcast-Time Warner Cable Merger in anticipation of this ruling. [2]

The ruling came as a relief to several media houses, including CBS (NYSE:CBS), Disney (NYSE:DIS) and Viacom (NASDAQ:VIA), that had protested the FCC’s plans to allow certain third-parties to view parts of their contracts with Comcast (NASDAQ:CMCSA) and DirecTV. The FCC had countered that disclosure of the information was necessary for the outside parties to give their opinion on the proposed mergers and had assured that such third parties would be bound by a protective order. [2]  However, the appeals court found the FCC order to be “substantively and procedurally flawed.” The three-judge panel further ruled that the commission had failed to show that the disputed sensitive information was material to the review process. [1] After the ruling, an FCC spokesman said that the commission was studying the ruling and considering the options available to it.

DirecTV’s stock gained around 1.8% over the week through Thursday. We currently have a price estimate of $95.07 for DirecTV. For the year 2015, we estimate revenues of $34.6 billion, in line with the consensus estimate, and EPS of $6.07, compared to a consensus estimate of $6.00.

Higher ARPU’s Lead To Pay-TV Revenue Growth For Dish

Dish Network (NASDAQ:DISH) reported its first quarter earnings on May 11th. The company’s revenues grew 3.6% to $3.72 billion while net income came in at $351.5 million, or 76 cents per share, compared to a profit of $175.9 million, or 38 cent per share, in the prior year quarter. [3] Dish lost 134,000 video customers during the quarter while it had added 40,000 new subscribers during the same period a year ago. [3] Reported average revenue per user (ARPU) grew 4.4% to $86.01 for the quarter. We continue to believe that APRU will grow steadily in the coming years driven by periodic price increases. Programming costs rise each year due to a periodic increase in the carriage fee for various channels, which is a critical part of the multi-year agreements between media companies and pay-TV service providers. To protect margins, pay-TV companies typically increase prices periodically and pass on the burden of increased programming costs to subscribers. We expect this trend to continue and drive ARPU up.

Dish’s management expressed confidence that Dish’s streaming service Sling TV is well poised to take advantage as consumers increasingly shift to alternative platforms in order to consume content. The management indicated that they are satisfied with service’s base offering and will not be tinkering with it anytime soon. [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, Cartoon Network/Adult Swim, etc. [5] Dish’s management feels that the streaming service is well stacked with content and isn’t lacking any particular content provider that could potentially hinder its success. The management is more focused on keeping the pricing attractive in order to gain more subscribers. Subscribers do have the option of adding more content to their package as the service offers various paid add-ons.

Dish Network’s stock declined around 0.6% over the week through Thursday. We currently have a price estimate of $79.80 for Dish Network. For the year 2015, we estimate revenues of $15.3 billion, compared to consensus estimate of $15.2 billion, and EPS of $2.1, compared to a consensus estimate of $1.7.

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Notes:
  1. U.S. appeals court throws out FCC order on programming contracts, May 8, 2015, Reuters [] []
  2. FCC Stops the Clock Again on Comcast-TW Cable, AT&T-DirecTV Merger Reviews, March 13, 2015, Variety [] []
  3. Dish Network’s SEC Filings [] []
  4. Dish Network’s (DISH) CEO Charlie Ergen on Q1 2015 Results – Earnings Call Transcript, May 11, 2015, Seeking Alpha []
  5. Sling TV: Everything you need to know, January 20, 2015, cnet.com []