Cover Story: Is Dish Broken?
Charlie Ergen Scrambles To Stabilize His Company
by Mike Farrell -- Multichannel News, 3/9/2009 2:00:00 AM
After years of defying expectations to build the nation’s No. 2 satellite-TV provider, Dish Network chairman, president and CEO Charlie Ergen faces what could be his greatest challenge ever: How to dig his company — and his reputation as a successful maverick — out of a black hole.
In the past 15 months, Dish’s stock price has plunged more than 71%, to $9.10 per share on March 3, 2009. Its revenue growth cratered in the most-recent fourth quarter, to 1% compared to a year earlier. And its customer losses jumped from 25,000 in the second quarter (its first quarterly subscriber loss ever) to 102,000 in the fourth quarter.
All the while, the overall economic climate continues to worsen, with the stock market plunging to its lowest point since 1997.
“You can look at [Dish’s] valuation and say, 'Wow, how much lower can it go?’ ” said Janco Partners telecom analyst Murray Arenson. “By the time we get to next quarter’s numbers, hopefully there’s plenty to talk about.”
During past rough patches, the 56-year-old, Tennessee-born Ergen has been able to effectively diffuse concerns with a homespun demeanor and an un-CEO-like willingness to accept blame for bad performance. That’s basically what Ergen did last week on Dish’s fourth-quarter conference call with analysts.
While Ergen gained some praise from analysts on the call for eschewing the normal corporate boilerplate and moving immediately to the question-and-answer segment, his explanation for the poor performance didn’t appear to cut the mustard with most of his audience.
“In 2008, the goal was to stop getting worse,” Ergen said on the March 2 conference call. “In 2009, we are prepared to go forward by getting better. There were a couple of major things we did right. It was disappointing that operationally, we made the product too complex. But that is much easier to change than your balance sheet.”
One of the many mistakes Dish made in 2008 was making its product “too complex,” Ergen said. He is now touting a new focus on customer service and a simplified $9.99 six-month promotional offer for 100 HD channels for customers who commit to a long-term deal.
Collins Stewart media analyst Tom Eagan, in a research note issued after the conference call, wrote that Ergen appeared upbeat, but that “it’s difficult to understand why. There didn’t appear to be a single operational metric that suggested a turnaround was imminent.”
Eagan then went on to lower every growth target he had for the company, increasing his subscriber-loss estimate for 2009 from 98,000 customers to 392,000 and dropping his cash-flow estimate from $3.4 billion to $3.2 billion, as higher subscriber acquisition costs are expected to lower margins. Eagan also reduced his free-cash-flow estimate for the direct-broadcast satellite giant from $1.2 billion to $1 billion for the year.
Sanford Bernstein cable and satellite analyst Craig Moffett also worried about Dish’s poor revenue growth, just 1% in the period. One year ago, Moffett noted, Dish’s revenue was growing at an 11% clip. With the fourth quarter, the company’s sequential revenue growth is now negative — quarterly revenue contracted by 0.5% from the third quarter, Moffett noted.
Dish has been bleeding customers at an alarming rate — it lost subscribers in each of the last three quarters of 2008, ending the year down 102,000 customers. Most surprising: The losses are coming as rival satellite-TV operator DirecTV is having some of its best quarters ever. In the fourth quarter, DirecTV well outpaced analysts’ estimates by adding 301,000 customers, its best basic growth in nearly four years.
So why is Dish Network faltering while its rival thrives? Many analysts believe that Dish’s problems stem from several factors: its largely low-end demographic, the failure of its distribution partnership with AT&T and the dismal economy.
And while the fourth quarter was dismal, it could get even worse. Moffett pointed out that Dish’s distribution agreement with AT&T, which contributed phone and Internet service to the partnership, was still in effect in the period — it expired in February — and likely offset losses by at least 50,000 customers. Moffett estimated that the loss of the AT&T deal could translate into an additional 100,000 subscriber losses each quarter.
“Unfortunately, 2009 looks poised to be worse,” Moffett wrote. “Without AT&T, gross additions will face continued downward pressure. And a worsening economy poses a stiff headwind to any hopes of churn improvement.”
Janco’s Arenson said, “You’ve got to wonder about the demographic base they have built for themselves and if there is a way to dig out with that same base.”
While analysts are predicting doom, Ergen thinks he has the answer to Dish’s dilemma: a new focus on customer service and a simplified $9.99 six-month promotional offer for 100 HD channels for customers who commit to a two-year agreement.
Those subscribers would have to sign on for at least two years of Dish service at the regular price. While there is a danger that such a low-priced promotion would attract consumers with no intention of paying in the first place, the idea is to sign on enough customers to offset any churn danger and give a quick boost to subscriber rolls.
“It’s the kind of move where the question has to go through your head: Is this a smart, proactive move or is this a move of desperation?” Arenson said. “We’ll see. It’s a six-month deal, so it’s going to be like a lot of these things and you’ll have to ride it out and wait and see what it looks like six months from now.”
But six months is a long time in the TV business, and given the foundering state of the economy, it’s practically a lifetime. In the past six months, Dish Network’s stock has fallen from $28.33 per share to $9.10 per share, a 68% ($19.23) decline.
Despite the concerns about the future, no one is ready to write off Dish, or Ergen for that matter. The plucky CEO has managed to wrangle his way out of past troubles — one only needs to think back to the failed merger with News Corp. in the late 1990s and how the satcaster came roaring back after many had abandoned hope.
If the $9.99 promotion takes hold — Dish only started it last month — it could attract enough new customers to take some of the pressure off the company. Dish also may get a needed subscriber boost from the federally mandated transition to digital over-the-air television, now scheduled for June 12.
Another ace up the former poker player’s sleeve: Sling Media, the technology firm that merged with Ergen’s other company, set-top box maker EchoStar Corp., last year.
EchoStar unveiled a Sling-enabled set-top at the Consumer Electronics Show in January, and is expected to deliver it to Dish Network in the spring.
That box — which will provide digital video recorder-like functionality wirelessly, allowing consumers to shift programming between their television, computer and other TV sets in their home and elsewhere — could be the killer application that sets Dish’s subscriber growth back on a positive path.
In a perfect scenario, Arenson said, Dish would get that quick subscriber boost and next, most likely in the second half of the year, would engineer an HD and Sling-driven product that will offset any demographic or customer-churn issues from the low-end product and simultaneously build a high-end base.
“It’s way too early to chalk him up for dead,” said Arenson of Ergen. “What the magic ticket is to make it all turn, I don’t know, but it’s there to be had, because there are other competitors having it.”
At a Glance
Founded in 1980 by Charles Ergen, his wife, Cantey Ergen and James DeFranco, Dish Network’s first broadcast (via its first satellite, launched atop a Chinese-made rocket) to customers was on March 16, 1996, according to a company timeline. Here’s what it looks like now:
| SOURCE: Dish Network |
|
| Headquarters: | 9601 South Meridian Blvd., Engelwood, Colo. |
| 2008 Revenue: | $11.6 billion |
| 2008 EBITDA: | $2.9 billion |
| Key Employees: | |
| Chairman/CEO | Charles Ergen |
| EVP/Operations | W. Erik Carlson |
| EVP/Corporate Development | Thomas Cullen |
| EVP/Sales & Distribution, Travel/Events, Marketing | James DeFranco |
| EVP/General Counsel and Secretary | R. Stanton Dodge |
| EVP/Chief Financial Officer | Bernard Han |
| EVP Commercial and Business Development | Michael Kelly |
| Vice Chairman | Carl Vogel |
| EVP/Chief HR Officer | Stephen Wood |
| Subscribers: | 13.68 million |
| Employees: | 26,000 (As of Dec. 31, 2008) |
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Dish started failing shortly after they switched from using local Dealers to direct sales and direct service.
Also the switch to a India call center is one of the top 2 reasons for disconnects. The second is the unqualified service men they are using.
Right now dish has run off most of its dealers by forcing them to pay $400+ for equipment and then give it away for free. Dish will repay the dealer but take it back if the customer disconnects so dealers have a loss on every bad account.
If dish wants to stop dealers from switching customers to DirecTv they need to fire the India call center and bring dealers back by allowing them join the dish install and repair network (which is now closed to everyone but a special contractor) and protecting dealers from chargebacks. If the customer is going to get free equipment then it should be free to the dealer.
Right now the internal contractors and installers of dish do not have to pay for equipment and get charge backs so why should dealers.
This companty will be dead soon if they do not change.
unknown - 3/19/2009 8:46:36 PM EDT -
i work for dish and it seem that the company is doing bad all of a sudden we have to kiss butt on every phone call we cannot allow a customer to hang up if they even hint they want to cancel we must offer them a 50 dollar discount over 5 months, to try and keep there account (hardly worth it huh) no matter how loud a customer yells how may times a customer curses at me or insults me (they are right) no one from a supervisor to a manager will step in to calm the customer down, right now they are even forcing us to work 6 days a week to keep the average call wait to 30 seconds. if you ask me we should be able to hang up on the person who call in to say how much they hate dish, in that time i can help out someone who needs help, if i do not agree to work 6 days i can lose my job. i have always thought you cannot force great customer service out of an agent and that is exactly what they are doing at work, by now our customers know that all they have to do is call in and yell enough and the fee or charge will get waived even though they are wrong,
eric - 3/11/2009 4:02:22 AM EDT -
Charlie Ergen, despite perception in the Fninancial sectors, is a visionary. The only problem with Dish is
too many employees who are "specialist" The company needs to consolidate departments and trim the staff to multitaskers. Its a Satellite Service provider, not an employment agency. They have to reduce their operating cost to remain competitive with DIRECT.
John - 3/10/2009 6:07:39 PM EDT -
HDNet and HDNet Movies are to be removed by May 1st unless there is new agreement. Dish should just die!
Jack - 3/9/2009 10:30:34 PM EDT -
Take it from someone who works there now that this company is a disaster. Employees hate working for this jerk and leave daily and he does nothing to make it any better. When the economy turns around there will be no one left but the idiots who drank the kool-aid
Jackie - 3/9/2009 7:42:37 PM EDT
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