News

Dish's Ergen Down on Discounts

11/14/2009 2:00 AM Eastern

Dish Network is trying to wean itself from heavy discounting, despite the fact that it may have been a major factor in the second-largest satellite-TV service provider's third-quarter subscriber gains.

“I hate giving away programming. I hate the discounting we do today; in part, it does cause you problems on the back end,” Dish chairman and CEO Charlie Ergen said on a conference call with analysts to discuss third-quarter results last week.

Ergen added that heavy discounters have to brace themselves for heavy churn rates when those discounts roll off. And he said Dish Network will probably be no different.

Dish added 241,000 net new subscribers in the third quarter, a big surprise for analysts, who were expecting anything from a loss of 42,000 customers in the period to a gain of about 50,000 subscribers. And the quarter appeared to reverse a troubling trend of quarterly subscriber losses at the No. 2 satellite service provider — it was the second straight quarter of subscriber gains after three consecutive periods of losses.

In a research note, Sanford Bernstein cable and satellite analyst Craig Moffett wrote that while the subscriber gain was a big surprise, so was the decline in average monthly revenue per customer (down to $69.51 vs. $69.82 last year). The decline was likely the result of discounting and customers that are trading down to a less-costly level of service, Moffett wrote.

Dish has a history as a heavy discounter — it introduced a $9.99-per-month package for 100 channels earlier in the year — and has touted itself as the low-cost satellite provider.

Ergen believes that because Dish is priced about $15 per month lower than its competition for essentially the same product, there is room to drive growth and average monthly revenue per customer.

“Our focus will be to not get in at all, but when we are involved in it, to be at the low end of the scale in discounting,” Ergen said. “I would be very scared to be higher than we are today.”

Ergen didn't seem too impressed with his decision to issue a one-time $2-per-share special cash dividend to shareholders, adding that it wasn't his top choice and was driven mainly by the expiration of more favorable tax policies.

“For a lot of our investors, this is the lowest tax they might pay for a dividend for a long, long time,” Ergen said. But later he added that while he would have preferred to spend the money internally to grow the business, a number of factors — the tax issue, the overhang on the stock from its ongoing TiVo litigation and a lack of compelling acquisition deals — forced his hand.

“If we can't find ways to use our money, then I think dividends are always on the table for us,” Ergen said.

Ergen said the company is currently testing uses of the wireless spectrum it purchased in 2008, including mobile video.

But he said that any product offering — including mobile video — would depend on what direction the Federal Communications Commission takes.

“We're going to come up with two or three good uses for the spectrum and then see where Washington indicates they're going to go with long-term spectrum policy,” Ergen said. “From an investment perspective, you shouldn't expect a large capital commitment in the near term until we have a better idea of where Washington will be with it.”

September