Dish Network May Not Be Cheap, But It'll Be Interesting

By Stephen D. Simpson, CFA | January 15, 2013 AAA

Like DIRECTV (Nasdaq:DTV), Dish Network (Nasdaq:DISH) must face the difficult reality that pay TV is not only a more competitive market with the entry of AT&T (NYSE:T) and Verizon Wireless (NYSE:VZ). It also must compete with on-demand options offered by a host of services like Hulu and Netflix (Nasdaq:NFLX). Although the company doesn't look like a tremendous value today, it has a shrewd and savvy management team that could make things interesting.

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Tough Times in Pay TV
For all of Dish Network's potential strategic options (more on this in a moment), the company's core satellite pay TV business has serious challenges. While Dish Network has a solid low-cost platform and offers products such as "Hopper" to its customers, the company has nevertheless been losing subs.

Unfortunately, the reason for the sub losses is "all of the above." The company is losing to DIRECTV by virtue of the latter's offering NFL Sunday Ticket as a loss leader, and losing to entrenched cable companies like Comcast (Nasdaq:CMCSA) on bundled services. AT&T and Verizon are stepping up their fiber to the premises' initiatives and can offer pay TV services to about one-third of the market. Then there are the services offered by Hulu, Netflix and the like that essentially allow viewers to watch whatever they want, whenever they want.

Making matters worse, Dish Network doesn't have a strong Latin American pay TV business to offset those challenges.

SEE: Earning Forecasts: A Primer

Do Investors Want the Company to Invest in Wireless?
The biggest unknown with Dish Network concerns its plans for wireless services. The company owns a significant chunk of wireless spectrum, and it still awaits final determinations from the FCC as to what it can do with it. While the company has said it doesn't intend to enter the wireless market without a partner, investors don't necessarily believe that, and there's ample "wiggle room" as to what form, size or nature a partnership may take.

While both Sprint (NYSE:S) and T-Mobile would be logical partners for Dish, they each have their own plans. T-Mobile is merging with MetroPCS (NYSE:PCS), and Dish Network reportedly had entered a bid for MetroPCS.

The Sprint situation is more interesting. As most readers likely know, Sprint has made a bid to acquire the remainder of Clearwire (Nasdaq:CLWR), but the bid has encountered a great deal of complaints from other Clearwire shareholders. Dish Network threw an additional monkey wrench into the works earlier in January by offering $3.30 per share for Clearwire - about 11% higher than Sprint's bid.

It's not really fair or accurate to say that Dish Network's bid is "like for like" with Sprint's. Moreover, I suspect that Dish Network isn't really looking to acquire Clearwire, but rather force Sprint to the table to forge some sort of partnership/arrangement between the two companies.

I'm not sure creating a headache for Sprint is the best way to go about it, but between the bids for MetroPCS and Clearwire, it's clear that Dish Network is serious about wireless. Unfortunately, it's unknown whether this move would shift the company's value in a significantly more positive direction. The U.S. wireless market is profitable, yes, but it's not really a growth opportunity. That said, if the ability to bundle wireless with satellite pay TV improves the value of the satellite business, it certainly makes sense for Dish Network.

SEE: Analyzing An Acquisition Announcement

The Bottom Line
Under the Ergens' leadership, Dish Network has seldom been boring. While some investors may object to some of their decisions (including some aggressive moves that led to potentially expensive litigation), their ownership of the Class B shares all but assures that they're not going anywhere.

I wouldn't dismiss the value of Dish Network's wireless spectrum, but the company's historical fundamental performance relative to DIRECTV doesn't impress me, and there are still ample risks regarding how it will execute its wireless strategy. Accordingly, while I don't believe these shares are overpriced today, they're not nearly enough of a bargain to interest me.

At the time of writing, Stephen D. Simpson did not own shares in any company mentioned in this article.

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