Dish Network, long the rural market go-to guy for pay TV service, saw its video subscriber base rise in the third quarter, which some analysts see as a sign that the satellite TV company has finally been whittled down to its small market core.
Dish added 116,000 pay TV customers in Q3, mostly due to its Sling TV over-the-top service, which added 203,000 customers in the period. Satellite TV subscribers fell by 87,000 in the quarter, slightly more than consensus estimates of a loss of 74,000. While the pandemic probably had a lot to do with that -- across the board consumers have been reluctant to cancel service when they are mainly confined to their homes. But it could be a sign that what analysts have expected for years is finally here.
This isn’t the first time that Dish ended up with a net positive in its pay TV subscriber base -- it gained about 148,000 in Q3 2019. But this gain comes after three straight quarters of losses at Sling TV (94,000 in Q4 2019, 281,000 in Q1 2020 and 56,000 in Q2 2020). Whether this means that Sling TV has turned the corner too also is up for debate. It could be a combination of the pandemic, the return of sports or the fact that rival vMVPDs raised their prices faster.
Sling TV implemented a $5 per month rate hike in January, but rival YouTube TV raised its prices by about $10 per month to $65, Hulu Live upped its monthly charge 22% to $54.99 and Sony PlayStation Vue shut down. While vMVPDs aren’t where cord cutters are going anymore -- they seem to gravitate toward a mixture of direct-to-consumer offerings -- it could be that Sling TV, by far the lowest-priced vMVPD at about $30 per month was able to take advantage of that.
On the satellite TV side, MoffettNathanson principal and senior analyst Craig Moffett wrote in a research note that the steady contraction of customers over the past decade -- Dish’s satellite subscriber base has fallen by about 5.4 million customers since 2010 -- has left a rural base for which traditional and OTT distributors don’t want to or can’t reach. That should at least last until cable operators complete the planned expansions of their fiber networks into rural markets. Until then, the rural-centric strategy is working, Moffett said.
While Sling TV has improved -- the Q3 subscriber gain puts its subscriber base about where it was in 2019 -- it’s not necessarily in a good position. Moffett estimated that Sling is “almost certainly losing money,” given its price point and the amount of programming its offers.
“It’s hard to imagine that even Dish sees a path forward to meaningful profitability,” Moffett wrote. “So what, exactly, is it for?”
Moffett didn’t have an answer, and Dish probably doesn’t either. So far it looks that Dish’s TV business is becoming an accounting play. It managed to cut costs in Q3 by its timely decision not to carry Sinclair Broadcast Group’s RSNs and a decline in gross additions helped drive down subscriber acquisition costs (SAC) in the period. But those, according to Moffett, are “non-repeatable tailwinds.”
Bernstein analyst Peter Supino wrote in a note to clients that continued losses on the satellite side could be a good thing for Dish if it helps ease regulatory restrictions concerning a future merger between Dish and No. 1 satellite TV service provider Dish Network. Last month reports claimed that the Federal Communications Commission would object to a Dish/DirecTV merger. But with a new administration possibly on the way, that stance could change.
“While we remain cautious about Dish's Pay TV business, over time, bad may be good for satellite TV, to the extent it improves the regulatory backdrop for a merger of DirecTV and Dish once the next FCC Chair is in place,” Supino wrote
DirecTV parent AT&T has been unofficially shopping the satellite unit to potential buyers -- with the most recent reports saying several private equity firms have expressed interest in buying an interest in a combined DirecTV, U-verse TV and virtual MVPD AT&T TV Now. Dish chairman Charlie Ergen, who in the past called a Dish/DirecTV merger “inevitable,” reiterated those thoughts Friday on a conference call with analysts.
“Make no mistake, whether it’s a year from now or 10 years from now, I believe it’s inevitable those companies go together,” Ergen said.
In the meantime, Dish is most likely running the satellite business for cash, which in turn could be a source of funding for the business most investors seem to care about -- wireless. But the wireless business is pretty murky too. Dish has a lot of spectrum but hasn’t yet built out the network that will take advantage of that. And the prepaid wireless business -- Boost Mobile, which it acquired from T-Mobile, part of the regulatory approval requirements for the larger company’s purchase of Sprint -- isn’t seeming much better. In its characteristically sparse Q3 press release, Dish said it had lost about 212,000 retail wireless customers. Boost ended the quarter with about 9.4 million customers.
On the Friday conference call, Ergen offered more information regarding its wireless buildout plans. Dish’s wireless network will be based on open RAN (radio access network) technology, but Ergen said it won’t fire up service in its first major market until Q3 2021. Asked how he plans to cover 70% of the country by June 2023 -- one of the federal requirements for his wireless licenses -- Ergen said that Dish would activate smaller communities in Q1, and is on track in its 5G deployment.
“We look at businesses where we can build something less expensive and better,” Ergen said on the call, adding that the Dish wireless network will be more flexible. “This network can do what other networks can’t do.”
He explained that using the network slicing capabilities of its cloud-native open RAN technology, should be popular with businesses with private networks. “That’s relatively unique to Dish wireless,” Ergen said. “I’m not sure we have competition for that. ...We’ll be a factor in the consumer business, but an even bigger factor in the enterprise business.”
Ergen still believes he can build the network for $10 billion, a figure some analysts have called dangerously low. But Ergen said with the open RAN architecture and its MVNO agreement with T-Mobile, that cost can be spread out over a longer period.
“While initially we thought that $10 billion might be spent over three years, with the MVNO network deal with T-Mobile, we have a nationwide network today, we have use of a nationwide network today,” Ergen said. “And now we don’t have to wait until we build the whole network to monetize it. ...The net effect is that $10 billion is spread out over seven years instead of being stretched out for three years.”
Wireless margins in the period were a slender 5.9% (other prepaid providers like Tracfone, have margins in the 10% range, surprising in that Dish had earlier touted its low variable costs due to the great deal it got from T-Mobile, which at the time was pretty desperate to sell Boost Mobile and get its Sprint deal done. But Moffett added that maybe those costs are still low, but other factors compressed margins.
“Perhaps that’s not a sign of underlying costs of goods sold, and instead reflects inflated SG&A costs as Dish gets its arm around a new business,” Moffett wrote. “Only time will tell.”
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