Better-than-expected earnings and less-than-expected subscriber losses helped propel shares of satellite TV provider Dish Network (Nasdaq:DISH) to a one-trading-session gain of more than 17% to start the week. But tough trade conditions and intensifying competition could make such enviable comparisons increasingly difficult to achieve in future quarters.

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Sharp Drop in Promotion Expenditures Leads to Surprise Earnings Gain

The good news was that earnings per share for the first quarter period came in at 70 cents - well ahead of analysts' consensus expectations of 56 cents. A drop in subscriber acquisition costs was the key factor behind the surprisingly stronger earnings. Subscriber losses, while hefty at 94,000, were still fewer that the 128,000 analysts had feared. Also, average revenue per user increased to $70.03 from $67.93 a year earlier. Less positive was the fact that customer churn rate, the monthly rate at which subscribers are lost, increased from 1.68% to 1.83%.

Consumers Tuning Out
Minimizing these subscriber losses and gaining new customers at an acceptable cost are now the key challenges faced by the company. Unfortunately, times are tough and getting increasingly tougher in the pay-TV industry. The recession has prompted consumers to cut back on perceived non-essentials like cable and satellite TV. And of those keeping their subscriptions, only 37% indicated they were getting good value for their money according to a recent poll. With free content on websites like Google's YouTube (Nasdaq:GOOG), and videos for purchase from NetFlix (Nasdaq:NFLX), which recently upped its subscriber guidance for 2009, it's no wonder that providers like Dish as well as rival companies like Comcast (Nasdaq:CMCSA) and Cablevision (NYSE:CVC) lost subscribers in 2008.

Loss of Key Partner Will Hurt New Subscriber Growth
Finding new customers is going to be doubly hard for Dish now that its key partnership with AT&T (NYSE:T), which allowed the phone company to package Dish's video service with AT&T's telephone and internet bundles, came to an end earlier this year. Rival satellite TV provider DirectTV (Nasdaq:DTV) replaced Dish in the AT&T arrangement, and has seen its subscription rates rise.

Legal Risk Remains High
Also adding to Dish's current challenges is the ongoing uncertainty stemming from a patent infringement lawsuit brought by digital video recorder maker Tivo (Nasdaq:TIVO). Dish has already had to pay $104 million to Tivo, a further claim Tivo has filed could potentially cost Dish hundreds of millions of dollars each month.

The Bottom Line
Despite gains to start the week, Dish has some serious challenges to contend with. The recent share price run-up was a bit of investor exuberance, which can be used as a selling opportunity. (Read Buy When There's Blood In The Streets to learn how contrarian investors find value in the worst market conditions.)

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