Compared to the cable companies, which have suffered consistent subscriber losses for the past few years, satellite pay-TV service providers have done well. However, unlike its competitor DirecTV (DTV), Dish Network's (DISH) performance has been mixed. As a result, its subscriber base has increased at an average annual rate of just 0.4% for the past five years.
The growth hasn't been consistent either as the years between 2008 and 2011 saw a net decline in the number of subscribers. Due to this slow growth, Dish Network's pay-TV market share has declined slightly from 13.6% in 2007 to 13.4% in 2012. The loss of certain key distribution partners such as AT&T (T) and Centurylink, multiple disputes resulting in channel blackouts and the lack of focus on customer credit quality are some of the factors that led to this decline.
Going forward, we expect Dish Network's pay-TV market share to more or less stabilize in the long term as we believe that the company will be able to increase its subscriber base and grow with the overall market. Investments in spectrum and plans to build a mobile network, support from Blockbuster's streaming service, and an increased focus on high quality subscribers will help the company sustain a slow but steady growth.
We Expect Slightly Better Subscriber Growth Rate Compared to the Past
In the past five years, Dish Network's subscriber base has grown at an average annual rate of 0.4%. The number of subscribers increased from 13.8 million in 2006 to 14.06 million in 2012. Despite this growth, the company's share in the U.S. pay-TV market declined slightly implying that the overall market grew at a faster rate.
A loss of distribution partners, disputes with media companies, a lack of focus on customer credit quality and competition from telcos were major factors moderating Dish Network's subscriber growth. However, given that the telcos such as AT&T and Verizon (VZ) have slowed down their expansion, we expect the future subscriber growth rate to improve very modestly (~0.7%). This will imply that the company will be able to more or less maintain its market share in the long term. These positive factors are discussed below.
Spectrum Investments and Blockbuster Streaming Will Help
Dish Network has acquired spectrum assets from TerreStar and DBSD North America. The company's recently proposed acquisition of Clearwire indicates that it does not just want to build a wireless network but desires to become one of the major players that can challenge the existing telecom giants. If Dish is able to acquire even a non-controlling stake in Clearwire, it could get an upper hand in negotiating a potential partnership with Sprint or other carriers. The successful construction of a nationwide wireless network will allow Dish to bundle broadband and voice services with its current pay-TV offerings, thus giving it a competitive edge. This bodes well for the company's subscriber growth. If Dish Network eventually builds a wireless service, it can either use a third-party infrastructure and host its spectrum on that or build everything on its own from scratch. The latter option is riskier since Dish does not have any experience in this field and additional capital expenditures might lead to investor skepticism.
Dish Network offers sling DVR technology to its subscribers allowing them to remotely access their pay-TV programming. Adding Blockbuster streaming is an excellent complement to this, thus giving subscribers true flexibility in what they want to watch when they want to watch it and from where they want to watch it. Blockbuster streaming service was launched in late 2011, and has helped Dish in improving its subscriber trends. Immediately after the launch, Dish registered two consecutive quarters of subscriber growth, which was a big improvement given how the company has performed over the last two years. The advantage to Dish is Blockbuster's existing brand, spending capability to get the streaming content, existing relationships with the content owners and the motivation to improve subscriber trends. Dish has priced its service at $10 per month, allowing its subscribers to gain access to streaming as well as by-mail DVD rental service.
In addition to this, the company has started to focus on higher credit quality subscribers. Such subscribers tend to be more sticky, leading to lower churn. This will help the company in maintaining its market share.
Market Share Growth Unlikely Due to Intense Competition
Even though Dish Network is employing multiple strategies to improve its subscriber growth, there exists fierce competition from DirecTV, cable operators such as Comcast (CMCSA) and Time Warner Cable (TWC), as well as telcos such as AT&T and Verizon. Unlike Dish Network, DirecTV has done extremely well and has grown its pay-TV market share from 17.4% in 2008 to 19.2% in 2012, as per our estimates. The company was able to do so because of its good brand and customer service, unique programing such as NFL Sunday Ticket and maintenance of better customer credit standards. In addition to this, DirecTV has benefited from gaining certain key distributors such as AT&T.
As far as cable companies are concerned, they are still losing subscribers. However, Comcast has improved a lot on this front as it lost only 12,000 net subscribers in Q4 2012. The company has been investing in improving its customer service and installation and promoting its Xfinity brand. It also introduced subscription streaming service called Xfinity Streampix, in order to create an incentive for its subscribers to stay. Telcos, with their fiber optic services including FiOs and U-Verse, are still gaining subscribers. The overall market is saturated and quite competitive. We believe that it will be extremely difficult for Dish Network to gain share. However, with slow and steady subscriber growth, it will be able to maintain it.
Significance for Dish Network
Although Dish has started offering satellite broadband service in partnership with ViaSat, its business is almost solely dependent on the pay-TV market as of now. Therefore, its share in the U.S. pay-TV market (or the number of pay-TV subscribers) is one of the most important business drivers. Given the past trends and the fact that the U.S. pay-TV market is becoming saturated and has high competition, we believe that there is not a lot of room for an upside/downside to our price estimate based on market share changes.
However, it is still important to understand the sensitivity of Dish Network's stock to this driver. If the company is able to increase its market share to 15% by the end of our forecast period ending 2019, there could be an upside of about 10% to our price estimate. However, this will imply that Dish will gain close to 2.6 million subscribers over the next seven years, implying an average annual gain of close to 380,000 net subscribers. We believe that this is highly unlikely. On the other hand, if Dish Network's pay-TV market share falls to 12% by the end of our forecast period, there could be a downside of around 5%-10% to our price estimate.
Our price estimate for Dish Network stands at $38, implying a premium of about 5% to the market price.
Disclosure: No positions.