News

High-Cost Gains for Dish

3/11/2010 8:33 AM Eastern

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 Direc-TV, 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 twoyear
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.”