As the economy continues to slow down and commodity prices heat up many companies will be raising prices to keep profit margins growing. Three recent examples of this are Nike (NYSE:NKE), Hanesbrands (NYSE:HBI) and Chipotle Mexican Grill (NYSE:CMG). Management generally cites commodity prices as the reason for the price increases. However often times shrinking margins can be attributed to the competition in the sector. Therefore by increasing prices a company with high expectations can cover up a lack of customer base.
On the other hand Netflix (NASDAQ:NFLX) has been booming and recently decided to change (pdf) the ways in which consumers can use the service. There are several other plans, but the following three are new additions:
- Unlimited streaming movies for $7.99.
- Unlimited one at a time DVDs for $7.99.
- Unlimited two at a time DVDs for $11.99.
After this announcement many consumers expressed great angst toward the company. Many customers said they would cancel the service stating the change in pricing is outrageous. However one must ask, is this increase in price really unfair?
Netflix was due for a price hike because the company has been growing at an incredible rate since it went public in 2002. If consumers do cancel subscriptions, it will be somewhere around the 5% range because consumers will eventually think about the fact that Redbox and other movie companies charge more. Once Netflix customers think of this the frustration will subside. In fact investors are standing by the company and the share price barely moved upon the news. Some investors point out the share price has fallen 6% since the announcement, but the fact is this is a needed pullback before breaking out to the next high. The share price was too close to the upper bound of the Bollinger Band; which represents an overbought phase. Also, the 12-day, 26-day and 50-day exponential moving averages were left behind prior to the downturn. The news simply gave investors a reason to take some profits and we will see the share make a break toward the 310 level in a few weeks.
With that said, let's assume the polls I found (I and II) are correct and about 50% of Netflix subscribers cancel their subscriptions. If this happens could Dish Network (NASDAQ:DISH) possibly topple the movie giant? This may be a tall order, but if Dish can put all the pieces into place the company may be able to put Netflix into checkmate. Let's take a look at what Dish Network would have to do to bring down Netflix.
Despite being the third-largest pay television provider, Dish Network already has the marketing capabilities to make a run at Netflix. The biggest problem facing Dish is pricing. Currently Dish has what is known as DISHonline, which gives subscribers and non-subscribers the ability to view live streaming movies and television shows. Of course non subscribers get a limited amount of content. Therefore this falls back to pricing because Dish already has source that can compete with Netflix. With the most basic plan being $24.99 until 2013, it is no surprise Dish has almost 35% fewer customers.
The next question is how can Dish get past these speed bumps and move into a higher realm of revenue and profits? Dish has began the process to increase revenue by purchasing two bankrupt companies. The first is satellite company DBSD North America and the second is the well known Blockbuster Video. These two companies paint a picture that Dish is attempting to upgrade video service and satellite capabilities. By upgrading these two aspects investors have a valid argument that Dish can surpass Netflix.
One key aspect of this will be timing. Dish will need to upgrade streaming video very soon while Netflix customers are riled up about the change of plans. With Blockbuster's movie cache now in Dish's cellar and Blockbuster already having a video streaming service, Dish can make up some ground on Netflix. If Dish can properly combine Blockbuster's on demand service with Dish Network's existing service, we may see customers switch over to Dish. However, once again, the problem comes back to pricing. Will Dish be able to offer the same, or better prices compared with Netflix? This is the main reason Netflix has been able to do so well while Blockbuster went bankrupt.
Currently Dish has already began offering three months of free unlimited one at a time DVD rental called Blockbuster By Mail. Could this be the precursor to something exactly like Netflix? Netflix's recent price hikes may give Dish a chance to steal the spotlight because it gives Dish the opportunity to set up several plans: first Dish could offer unlimited two at a time DVDs for $10.99 per month or unlimited one at a time DVDs for $7.99 to match Netflix and coax consumers to purchase the $10.99 plan. However it must be noted this is just speculation as Dish has not released any detailed plans.
Many questions will come up over the next few months as Netflix begins to put these new plans into effect. Will Netflix subscribers actually cancel subscriptions? Will Dish Network realize this is a golden opportunity to surpass Netflix? As I mentioned several times already, the biggest problem is pricing. Dish may end up ruining this golden moment by setting contingencies on the DVD plans. One of these contingencies I see happening is an unlimited DVD plan for under $7.99 only for costumers who subscribe to Dish Network's satellite service. Another plan with the same contingency could be to continue the current Blockbuster By Mail program only for customers who subscribe to Dish Network's satellite service.
Dish Network's management needs to realize video streaming should be placed first and foremost and let the satellite service sit in the back seat. Satellite service needs to be given a secondary role because Netflix has shown satellite television is not as popular as it once was; especially as the price gets higher. Not to mention Hulu has began to reach a customer base that was expected six months from now. If Dish Network can use Blockbuster correctly, it would not surprise me to see Dish subscribers double over the next three or four years.
Assuming Dish can make a competitive unlimited streaming and DVD plan the share price could take off. Since the November 2008 bottom, Dish has gradually grown to the current level; which is about 280% higher. The share price did face a difficult fight to get past the 20 level in 2010. However since the share price broke that resistance, the price ran to the upside. If Dish can set up something similar to Netflix and charge the same prices, without breaking patent laws, Dish could be a rocket stock over the next few years.
Let's go through a theoretical example as to how Dish can do this. Assuming all things being equal between Dish and Netflix, if Dish can gain 10 million subscriptions it would increase revenue by about 11% per quarter and net income by about 5.5% per quarter. It must be noted, these numbers are based upon if Dish Network were to offer the same pricing plans as Netflix did during the first quarter of 2011, and the cost of operations is equal as well. When considering different pricing plans these numbers are vastly different. If these quarterly increases were added to Dish Network's balance sheet, the share price would move 7%-12% instantly. Please note this 7%-12% share price movement is assuming the P/E ratio would stay the same.
The final question to ask is how likely is it that any of this is going to happen? As I have mentioned several times, Dish Network has not released any plans about what it will do with Blockbuster. This will surely be one of the focal points during the August 8 conference call. I would expect Dish to come out with some information about the future plans for Blockbuster in the 10-Q as well, but the company may want to keep everything under wraps. Dish has the potential to rocket up as we saw prior to the 2000 crash, and if the company can put all the right pieces into place we may see a new streaming giant emerge while Netflix fades into the shadows. Of course investors should keep in mind, even if Dish comes out with a slightly less expensive plan for the same service as Netflix; this will not guarantee a migration toward Dish Network because the company has not proven itself as well as Netflix has.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.