Dish Moving Beyond Pay Television

| About: DISH Network (DISH)

Summary

The growing popularity of streaming video is eating away at Dish’s subscriber base.

Dish’s revenue is growing because of added broadband customers.

Dish is considering a T-Mobile US acquisition in an attempt to build a moat around its declining core business.

Acquiring T-Mobile would give Dish a huge new source of revenue and potentially a lot of float.

Satellite TV provider Dish Network Corp (NASDAQ:DISH) is the latest company prompted to move away from pay television by the rise of streaming video. In an attempt to diversify its revenues and build a moat, Dish Chairman Charlie Ergen is seriously considering an acquisition of wireless provider T-Mobile US (NASDAQ:TMUS).

It is easy to see why Ergen is interested in T-Mobile; Dish has had a hard time maintaining its revenue in the past year. Dish's TTM revenue hit an all-time high of $14.41 billion in March 2012 but fell to $12.97 billion in March 2013. Dish's revenue has risen by a little over a billion dollars in the past year, but on June 30, 2014, it was sitting at $14.03 billion, still below the 2012 level.

The reason Dish has had a hard time maintaining its revenues is quite obvious; it is losing some of its most valuable customers to streaming video. Bloomberg reported that Dish lost 44,000 pay TV customers in the Second Quarter of 2014. The company was only able to maintain its revenues by adding 36,000 broadband customers.

Ergen has rightly concluded that broadband and wireless are the future and the only way to build a moat that can protect his company from the growing popularity of streaming video. The move is being driven by content providers such as World Wrestling Entertainment (NYSE:WWE), which started showing its popular pay per views on a subscription-based streaming video channel in February.

Streaming video, of course, drives the demand for broadband, particularly in areas with no cable service. Dish's satellite Internet service already reaches those areas. Adding wireless would make it easier for Dish to offer streaming video and TV on mobile devices and to penetrate urban and suburban markets.

Wireless = Revenue

Some recent revenue figures from T-Mobile show that wireless might be an even better source of revenue and float than broadband is.

T-Mobile's recent revenues figures seem to prove this hypothesis. Unlike Dish, T-Mobile has demonstrated steady and impressive TTM revenue growth over the past two years. In March 2012 T-Mobile reported a TTM revenue of $4.93 billion; in June 2012 that figure rose to $8.6 billion; in June 2013 T-Mobile reported a TTM revenue figure of $20.71 billion; and on June 30, 2014, it reported a TTM revenue figure of $27.57 billion.

Pay TV Float to Broadband Float

Under the old pay TV model, viewers were essentially forced to finance Dish's entire operation by subscribing to a lot of channels they didn't watch. A person who only watched ESPN had to buy the History Channel, CNN, etc., to see his sports. That gave Dish a lot of what Warren Buffett likes to call a steady source of easy-to-tap revenue.

Streaming video allows a person to pay for only the programs he or she wants. With streaming video available, customers have little or no incentive to subscribe to pay TV.

When faced with streaming video, Dish has one of two choices: It can try to compete directly with streaming video providers-a losing proposition. Or it can figure out a way to profit from streaming video. Ergen has chosen the latter course of action; he wants to use broadband and wireless subscriptions to make up for the lost pay TV subscription revenue. The broadband and wireless subscriptions become the new source of float.

This move makes a lot of sense because it allows Dish to profit from the growing popularity of streaming video without having to produce its programming. Instead of trying to produce a series like Netflix's (NASDAQ:NFLX) House of Cards, Dish provides the broadband the customer uses to download House of Cards.

The revenue figures show that a combination of television (Dish's core business), broadband, and wireless (T-Mobile's business) could be a perfect recipe for generating a lot of float. Dish can cash in on the growing trend of watching TV anywhere on mobile devices.

One potentially lucrative product from a Dish/T-Mobile combination would be a Dish broadband/T-Mobile wireless bundle. That would give Dish even more float by giving customers a chance to pay for wireless and broadband in the same bill.

A T-Mobile acquisition could also give Dish far more revenue with which to upgrade its network and technology. The combined revenue of Dish and T-Mobile would be around $41 billion.

That revenue could help Ergen dig a moat around his company to survive the growing streaming video onslaught. Dish will need that moat to protect itself from such aggressive players as Netflix, Amazon.com Inc. (NASDAQ:AMZN), and potentially Google Inc. (NASDAQ:GOOG).

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.