High-Cost Gains for Dish


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

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

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

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