Dishing Out a Dividend


Dish Network managed
to deflect any concerns that net
subscriber losses would continue
last week — they did — by showing
that despite the competitive
and economic climate, the company
remains willing to return cash to

The No. 2 U.S. satellite-TV provider,
which has struggled with
subscriber losses in the past, last
Monday reported a loss of 111,000
net subscribers in the third quarter,
well above analysts’ consensus
estimates of a loss of 80,000 net
customers and in stark contrast to
DirecTV’s 327,000 net new customer
additions in the same period.

But investors, who have been
overly sensitive to customer metrics
in the past, didn’t seem to care. Dish
stock rose by as much as 7% on Nov.
7 before closing up 5% ($1.18 each)
at $24.66 per share, mainly because
it said it would dole out a one-time,
$2-per-share cash dividend. That willingness
to share the wealth helped
alleviate at least one big fear of shareholders
— that Dish chairman Charlie
Ergen would hoard cash for an expensive
wireless play.

The cash dividend seemed to overshadow what some analysts
see as a fundamental softening in Dish’s core TV business.
Even though growth seemed strong — revenue up 12.1%,
to $3.6 billion; pro forma cash flow
up 8%, to $874 million; and net income
up 30.3%, to $319 million —
Dish missed analysts’ consensus
estimates on every target. At the
same time, margins on video shrank
from 24.6% a year ago to 24.3%, suggesting
to ISI Group analyst Vijay
Jayant that Dish is “having difficulty
taking out recurring costs from its
model despite subscriber growth being
lighter than anticipated.”

Sanford Bernstein cable and satellite
analyst Craig Moffett pointed to
weak subscription revenue — at $3.2
billion, it was up 1.5% over last year
but was down 2.4% from the second

“Straight-line annualization of
quarterly trends is never accurate
(there are clear seasonality trends to
consider), but anything in the ballpark
of a -10% annualized revenue
growth rate for a subscription business
is … well, terrifying,” Moffett

But Ergen seemed to ease investors’
greatest fear — that Dish would
commit to a major investment in
wireless broadband. It has already invested
about $2.8 billion to purchase

On a conference call with analysts,
Ergen referred to rival DirecTV’s strong third-quarter subscriber
growth, adding that satellite is still the most efficient
delivery vehicle for video. “We’re just not getting our fair share
of it yet,” he said. In light of that disparity, Dish has to figure
out other ways to capture revenue and customers.

“Consumers are consuming more bits and bytes of data,
video and voice,” Ergen said. “Strategically, we believe we
have to be in something other than a standalone video business
as a company. We are in the transition of being able to do
that. It’s going to take some time.”

Dish Network is still waiting for approval from the Federal
Communications Commission to combine the spectrum
assets of acquired satellite operators DBSD North
America and TerreStar. While those hurdles don’t appear
too difficult for the satellite giant to clear, it still has to build
the network, which could cost billions of dollars.

Ergen has said in the past that he would prefer to partner
with another provider to build a wireless network — Sprint
Nextel has been speculated as the most likely choice — but on
the call last Monday he said he would be willing to go it alone.

“We would be a natural partner for some,” Ergen said. “But
I believe there is a path for us to go it alone.”

Asked how he would value a business that has so much uncertainty,
Ergen said that was a problem for the analysts to
figure out.

“There is a tremendous business opportunity on the wireless
side and on the macro side of wireless consumption,” Ergen
said. “Every model assumes that the government wants
to create jobs and the government wants to create competition.
If you believe that, there are a lot of ways for us to compete
in the business beyond where we are today.

“We’re in fixed video today,” he added. “We hope to get into
the mobile voice, data and video business and we will likely
do that in some kind of partnership, if we are allowed to do
it. But it might not end up that way.”