News

Dish Woes Are Mounting

11/14/2008 7:00 PM Eastern

This year, Charlie Ergen’s Dish Network is struggling to overcome a “perfect storm” of obstacles and setbacks, with the satellite-TV provider reporting its second consecutive quarter of subscriber losses last week.

Missing Wall Street’s projections, Dish Network shed about 10,000 subscribers during the third quarter, compared with its gain of 110,000 subscribers in the year-ago period. In the second quarter, Dish had also reported a subscriber loss of 25,000 households, the first such loss ever for the satellite company.

“It doesn’t look like they’re going to be able to turn this around,” SNL Kagan analyst Mariam Rondeli said. “They’re looking at a very bad year next year with a lot more than just 10,000 subscribers lost. It’s just shocking to me how this has developed in some ways.”

DBS 3Q 2008 3Q 2007 2Q 2008 2Q 2007
SOURCE: Company reports.
Dish Network (-) 10,000 (+) 110,000 (-) 25,000 (+) 170,000
DirecTV (+) 156,000 (+) 240,000 (+) 129,000 (+) 128,000

In stark contrast to Dish Network, the dominant satellite provider, DirecTV, recently reported that it gained 156,000 subscribers in the third quarter.

Dish CEO Ergen blamed his company’s lagging performance on a variety of factors, namely operational problems, piracy, the economy, high churn and competition. To add to that list of woes, effective Jan. 31 Dish Network will lose its reselling deal with AT&T, a pact that currently accounts for about 1 million of its 13.78 million subscribers.

Ergen told analysts last week that it might make sense for Dish Network to “tread water” rather than spend to drum up new subscribers, since it appears Wall Street isn’t adequately valuing those customers.

“In today’s environment, the question is how much are you going to spend to go get customers and what kind of customers can you get?” Ergen said. “Obviously, people are shopping for deals and customers are flipping around. They have a variety of choices. So you have to be a little bit careful about that.”

While HDTV and DVR subscribers are probably good long-term customers for Dish Network to pursue, Ergen said: “At some point in time, you have to be willing to tread a little bit of water, based on the marketplace that’s out there. … The marketplace is not valuing our customers much greater than the SAC [subscriber-acquisition costs] that we have today.

“You have to be prudent in terms of where we spend our money. We’ve always said that satellite customers it the best place for us to spend our money. That may change be in 2009.”

A number of analysts lowered their projections for Dish Network after the company’s third-quarter report. For example, Credit Suisse now projects Dish will lose 16,000 subscribers this year. For 2009, Collins Stewart analyst Thomas Eagan is now forecasting that Dish will lose 100,000 subscribers next year, rather than gain 17,000.

“Nobody anticipated that the subscriber numbers would be so much lower this month than this time a year ago, and low relative to last quarter, which suggest that there’s something going on in terms of a possible trend here, a negative trend,” said The Carmel Group chairman Jimmy Schaeffler, a satellite-TV analyst. “After one quarter, I wouldn’t make that judgment. But after two quarters, you start becoming suspicious. The next quarter, the Christmas holiday quarter, is really going to be telling.”

Ergen has been trying to convince Wall Street that cash flow, not subscribers, is the best metric to value a company like Dish Network, said Schaeffler, adding: “And I don’t think he’s met with as much success as he would like. So it’s going to continue to be a battle for him.”

Last Friday afternoon, Dish Network’s stock was trading at about $11.25, not too far from its 52-week low of $10.49.

According to Rondeli, “They’re [Dish Network] still generating a lot of free cash flow. Their equity is certainly worth a lot less than it was.”

Unlike cable and the telcos, Schaeffler said, Dish Network doesn’t have a triple-play bundle, which gives distributors an opportunity to offset video subscriber losses with new phone and high-speed data customers.

Rondeli pointed out that Ergen has been blaming Dish’s problems on internal operational issues for several quarters now. To address those issues, Ergen noted that Dish has opened up a new call center and is right now is distributing new encrypted smart-cards to subscribers to thwart piracy.

“I’m a little bit shocked that it’s been a year and they don’t seem to be able to get their act together,” Rondeli said.

Sanford Bernstein analyst Craig Moffett was no happier.

“Waiting for a turnaround at Dish Network has the flavor of waiting for Godot,” he wrote in a report last week. “Hope springs eternal, but there are few tangible signs in Dish’s third-quarter results that signal a turn is near.

“Despite heavy advertising and the tailwind of a [temporary] marketing relationship with AT&T, Dish lost subscribers [again] in Q3,” Moffett added. “Unlike peers, the dark clouds at Dish have no obvious silver lining.”

September