Reviewing Dish Network’s Performance in 2016.

Dish Network‘s (NASDAQ:DISH) stock grew by 4.3% in 2016, 2.5 percentage points higher than the Nasdaq Composite index.  During the year, the company lost some of its footing in the Pay TV market with a decline in the number of subscribers, as cord-cutting is increasingly common. While the entire Pay TV domain is suffering, the impact on Dish has been mitigated due to the contribution from Sling-TV,  its online streaming service. In addition, the company has significant spectrum holdings worth over $30 billion, which gives it clout to roll out services in the wireless domain in the future. In this note, we review Dish Network’s business.

See our complete analysis for Dish Network

Pay TV Getting A New Breather Through Sling TV

Dish is the third largest Pay TV provider in the U.S. after Comcast and DirectTV, holding about 15.5% of the market. Before the advent of broadband internet, Pay TV services did well on the back of enhanced picture quality and the introduction of additional technologies such as HD programming and DVR services. However, with the widespread adoption of online streaming services, the age of stand-alone Pay TV seems to have fully matured. During the year, Dish continued to lose conventional satellite TV pay subscribers, even as subscribers for over the top (OTT) Sling TV improved. While the Pay TV segment contributes over 25% to the company’s value as per our estimates, the loss in conventional satellite TV subscriber will impact the topline in the future. With mounting subscriber losses (nearly 516,000 total in the last three reported quarters) Dish Network is banking heavily on its streaming service Sling TV to hedge against cord cutting. By the end of the September quarter, Dish Network’s Pay TV subscriber base has declined by 1.8% to 13.6 million. The company added 620,000 net new subscribers and reported a year low of 2.11% churn rate. The company does not report Sling TV numbers separately, and Dish’s net new subscriber gains indicate that Sling TV might be gaining traction with users, albeit at lower price points. With this increase in subscription base, Dish Network’s Pay-TV and broadband revenue was roughly flat at $11.4 billion for the first nine months of the fiscal year 2016.

Nevertheless, the company continued to respond to cord cutting to support its Pay TV services. In 2016, Dish rolled out multi-stream Sling TV (called Blue) and single stream services (Orange). Additionally, the company is expected to launch its own TV tuner box called “Air TV Player”, which will provide local TV channels over the air through a digital antenna, along with Sling TV’s streaming service and the ability to stream Netflix.

Going forward, as the company continues to launch new services for its OTT video on demand TV, its subscriber base will grow even though its topline might decline due to the service being offered at lower price points.

Spectrum Holding Is Still Valuable But Has Not Been Monetized

Trefis estimates that Dish’s spectrum holdings contribute close to 62% of the company’s stock price, with Dish’s pay-TV business constituting the rest. Dish has made significant investments in spectrum over the past few years and is the fifth largest holder of wireless spectrum in the United States. The company currently owns licenses to approximately 75 MHz of spectrum nationwide, covering over 23 billion MHz-POPs.

Dish amassed 40 MHz of AWS-4 spectrum when it acquired TerreStar and DBSD North America out of bankruptcy in 2011 for a combined sum of less than $3 billion. We estimate the pre-tax value of the same spectrum to be close to $22.4 billion at $1.73 per MHz-Pop. (See our calculation methodology – Dish Network – Price per MHz/Pop for AWS-4 Spectrum Analysis) The AWS spectrum supports LTE and can be used by wireless phones and other mobile devices for voice, messaging, and data services. Most smartphones are AWS-enabled and can communicate using this spectrum. It should also be noted that there is a significant difference in the value of downlink spectrum as opposed to uplink. The FCC has conditionally allowed Dish to use its entire AWS-4 spectrum for downlink purposes, thereby increasing the spectrum’s value. Dish has also acquired 10 MHz of the H Block Personal Communications Service (PCS) spectrum in an FCC auction that concluded on February 27, 2014. The H Block spectrum band is adjacent to, and can be paired with, Dish’s AWS-4 licenses, which is highly desirable. Another desirable aspect is that the spectrum covers every territory in the United States. We estimate the pre-tax fair value of Dish’s spectrum holdings to be around $30 billion (after relinquishing $3.4 billion worth of its AWS-3 spectrum to the FCC).

The company has failed to monetize its spectrum holding effectively. Despite this, the Company filed an application with the FCC to participate as a potential spectrum bidder for the sale of the 126 Mhz (megahertz) wireless broadcast spectrum (Auction 1000). 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 not only needs to ensure that it chooses the most optimal option when it comes to monetizing its spectrum holdings, it also Dish needs to make significant additional investments or partner with others to commercialize, build-out, and integrate these licenses, and any additional acquired licenses and related assets; and comply with regulations applicable to such licenses.

We currently have a $61.82 price estimate for Dish Network, which is inline with the current market price.

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