Dish Shows Industry Squeeze

By Greg Sushinsky | August 16, 2010 AAA

Satellite TV operator Dish Network (Nasdaq:DISH) reported a profit surge in the second quarter on stronger top line growth. While profits were up, net subscribers were down as the company lost some customers during the quarter. The Street was divided on how to read Dish's results.

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Revenue And Earnings Rise
Dish reported revenue of $3.17 billion, up from $2.9 billion the second quarter a year ago. Net income was $257 million, or 57 cents a share, up substantially from $63.4 million, or 14 cents a share. The company reported it lost a net 19,000 subscribers during the quarter. This was a reverse of its first-quarter results, which saw net income down 26% while net subscriber gains were 237,000.

The results in both quarters reflect the intense competition in the pay-TV industry as well as Dish Network's attempts to work out its approach to get both profitability and build its subscriber base.

An Intensely Competitive Industry
DirecTV (NYSE:DTV), Dish Network's main satellite competitor, gained 100,000 U.S. net subscribers in the second quarter. Dish Network is the low-cost provider, so it has positioned itself as a value player in what is still a very sensitive economy. Many consumers are thinly connected to their pay-TV service because of this.

Cable giant Comcast (Nasdaq:CMCSA) recently reported non-GAPP adjusted earnings up slightly for its second quarter. This is with its NBC Universal purchase factored out. Revenue and advertising was up year over year. Although the company has 23.2 million subscribers, it did lose 265,000 basic video customers during the quarter.

Time Warner Cable (NYSE:TWC) also lost subscribers, while Cablevision (NYSE:CVC) posted a small increase.

Dishing Up Some Positives
The fight for subscribers highlights the intense competition for pay TV customers. Investors want to know how well Dish Network is suited to compete. A revealing note on Dish Network management showed that insiders own a 55% stake in the company compared to a paltry 3% at DirecTV and a negligible amount at Time-Warner Cable. Large purchases of Dish Network stock continue by management. While this doesn't guarantee results, of course, it at least shows a concrete commitment by management.

Broader Issues Than Broadband
Competitors for pay TV include the telecoms Verizon (NYSE:VZ) and AT&T (NYSE:T), who have elbowed their way into the arena in the last several years. Beyond that, there are new threats on the horizon such as Netflix (Nasdaq:NFLX). Netflix is paying $1 billion for the rights to stream movies from Paramount, Lionsgate Films (NYSE:LGF) and MGM in the next five years, which will add considerably to the potential of more and more quality video content becoming available on the internet.

Dish Stock and Others
Despite the fabulous vote of confidence from heavy insider buying and ownership of Dish stock, there are overriding factors that should make investors pause. The field in pay TV is jammed with competitors so the lack of overall growth in and fragmentation of subscriber bases will become more of a trend.

Also, internet TV, which seemed silly only a couple of years ago, is a very real development. Once the meaningful choices are expanded beyond the either-or of cable or satellite, then it's game on. While the cable and satellite have only felt the early stages of alternatives to their duopoly, change is on the way. So, if you want to buy Dish stock or any of the pay TV ventures during the next couple of years or trade in and out, that's one thing, but as a five or ten-year investment, it doesn't look wise. (For more stock analysis, see The Upside Of Trucking.)

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