High-Cost Gains for Dish

Satellite Provider's Discounts Lure Subscribers That May Not Stay

by Mike Farrell -- Multichannel News, 3/8/2010 12:21:39 PM

Dish Network is adding subscribers and reveling in a price war against satellite-TV archrival DirecTV, but the discounts it is using to get new customers could make them hard to hang onto.

Dish reported 249,000 net new subscribers in the fourth quarter, its third consecutive period of gains after a decline of 92,000 customers in the first quarter. Dish, the second-largest U.S. satellite provider, ended the year in the black on the subscriber front -- it gained 422,000 customers for the full year, compared to a loss of 102,000 in 2008.

Dish chairman and CEO Charlie Ergen told analysts during an earnings call last week the video end of the business has become a "commodity," and thanked rival DirecTV for changing the competitive environment.

DirecTV began a campaign last year that focused on pricing -- offering discounts as high as 50% on some packages -- a departure from past marketing efforts that focused on HD programming, digital video recorder capability and sports programming.

DirecTV, the No. 1 U.S. satellite firm, declined to comment on Ergen's characterizations.

Dish has come under fire for its own attack ads against DirecTV, getting sued last month for alleged false claims in advertising. But Dish thinks putting the focus on price works to its benefit.

"We've always been much better in a commodity business," Ergen said. "In this environment, once TV became a commodity, we gained some momentum."

Dish executive vice president of sales, marketing and programming Tom Cullen said: "You've had the ‘Cola Wars,' the ‘Pizza Wars' and now we're in the ‘Video Wars.' Why pay more for essentially the same product?"

Analysts were split on characterizing the quarter, with Collins Stewart media analyst Tom Eagan and Wells Fargo media analyst Marci Ryvicker focusing on Dish's ability to soundly beat consensus estimates for revenue, cash-flow and subscriber growth. 

Sanford Bernstein cable and satellite analyst Craig Moffett focused on sustainability, noting that while subscribers were up, average monthly revenue per unit (ARPU) was "anemic" at $69.90 and subscriber-acquisition costs ballooned to $723 per gross addition in the period, well ahead of consensus of $703 and sharply higher than the $694 SAC in the third quarter.

"Dish Network is paying more to get subscribers ... and getting less when they arrive," Moffett wrote.

Moffett also questioned the sustainability of Dish's depressed churn rates -- at 1.44% in the fourth quarter it beat the 1.5% consensus estimate -- which the company has said is due in part to new discounting periods. Dish had said in the third quarter that churn rates would remain low until the company completed the transition from 18-month to two-year contracts.

The danger of relying on discounting was not lost on Ergen, who said during the call that he would like to dial back Dish's price-cutting efforts. He added that he has issued a challenge to managers to keep discounting to a minimum in the second half of the year, around the time its latest round of aggressive discounts are set to roll off.

"I hate discounting," Ergen said. "I hate devaluing the actual programming that we sell. I think we have some significant room for improvement."