Dish Network (DISH), the second largest satellite-based pay-TV service provider in the US, recently released its Q3 earnings. As a result of continued stunted growth in the subscriber base and mounting competitive pressure, we have lowered our price estimate for Dish Network’s stock to $24.87, which is about 30% ahead of the current market price.
Dish competes with satellite pay-TV service provider DirecTV (DTV), cable companies like Comcast (CMCSA) and Time Warner Cable (TWC) and telecom operators like AT&T (T) and Verizon (VZ) in pay-TV business.
One of the key takeaways from the earnings was that Dish Network’s margin outlook looks grim. Mounting competitive pressure, changing industry dynamics and the inability to grow its subscriber base are likely to put pressure on the company’s gross margins as well as lead to increased SG&A costs.
Currently we forecast gross margins to decline to a little over 44% by end of our forecast period. However, if they were to decline further to 40%, it can knock off more than 8% from our price estimate. Increased SG&A costs can further add to this downside.
1) Alternative Platforms a Threat
Only a few years ago, pay-TV service was the primary medium for video content however this is changing now. Alternative video platforms like Netflix and Hulu are emerging and posing threat to pay-TV industry’s profits. Dish Network acknowledged this threat in its recent earnings mentioning that while they may not lose customers as a result, they may lose ARPU (average monthly revenue per user) from that customer as more content is available on these alternate platforms.
2) Competitors' Pressure Margins
Time Warner Cable hinted during their earnings that they will be introducing low-cost programming packages to address lower end of the market. Such competitor moves hamper Dish Network’s ability to raise prices and the company may be required to aggressively promote its own low-cost packages and possibly reduce prices for some packages in order to address the threat. This will further put pressure on gross margins.
3) Dish may be required to increase its spending on subscriber acquisitions
While Dish Network is struggling to retain its subscribers, DirecTV has been doing fairly well. DirecTV gained about 174,000  net subscribers in Q3 2010 as opposed to a loss of net 29,000  subscribers for Dish. Its subscriber churn was significantly lower than that for Dish.
In order to compete, Dish Network may be required to do things differently. The company may be forced increase its marketing spend and offer additional services like watching videos from its library over the internet for free or minimal costs. This may increase subscriber acquisition costs for Dish Network, and consequently, SG&A.
Dish Network is in a phase of balancing subscriber growth while keeping costs in check. However from the looks of it, it seems that the company that will struggle with intensifying competition.
- Taken from DirecTV’s SEC Filing
- Taken from Dish Network’s SEC filing
Disclosure: No positions