You have to ask big questions about a management team that can spend almost $438 million shrinking the customer base, but that’s exactly what the team at Dish Networks appears to have done last quarter.
Dish spent some 438 million on subscriber acquisition costs, and yet managed to end up with less subscribers than it started with. Churn jumped from 1.94% to 2.02%, a difference of 0.08% per month, which when you have 14 million subscribers translates to an extra 11,000 more people canceling the service each month, an annual run rate of 134 thousand more a year. The total churn at that 2.02% rate, when annualized is 3.4 million. That’s how many subscribers Dish networks would lose in a year if it did not sign up a single new customer. So at the moment it is replacing that many each year, or just less.
But somehow, though we’re not sure why exactly, we have more than a little sympathy with Dish, because there is a monopoly influence in its market in the shape of AT&T deciding after all to back the ‘other’ horse in the two horse US DTH race, in the form of DirecTV.
Sure that decision was not taken in a vacuum, and the Dish management team, if it was operating on a ‘three strikes and you’re out’ basis would be walking back to the pavilion right now, or in fact some time ago.
The failure to cover the satellite moves of DirecTV when it had the insight to order all that extra capacity for HD services back in late 2004 was the first, and perhaps most telling of those mistakes. Failing to keep the Chinese in line over supplying the country’s mobile TV satellite capacity can be excused but it must have treated the AT&T decision as ‘in the bag’ in order for its negotiations to be turned down in favor of a satellite pay TV offer which was a) The same as Verizon’s and b) Would mean AT&T starting from scratch with the satellite offering and creating a mish-mash of subscribers, some on the old Dish deal and some on the new DirecTV deal.
Yes Dish had a strong hand in that negotiation, but somehow it managed to get its bluff called.
But this quarter, shows just what kind of immediate future Dish now has to cope with. AT&T is not yet working in DirecTV’s favor, so the plus in the equation, whereby AT&T boosts the Dish rival is not yet in play, only the minus, where it ceases its best efforts to build Dish customers. So while thee numbers are bad, they are going to look worse in future quarters (the one after next) by comparison with DirecTV which will be flourishing beyond its wildest dreams.
Dish reported revenue of $2.94 billion up 5.1% over the third quarter of 2007, but its net income fell to just $92 million compared with $200 million a year earlier. Dish insists that it’s not the fact that it spent a fortune trying to build its customer base, but that it had impairments on the value of securities it held.
But the fact remains that Dish lost 10,000 net subscribers during the quarter
ending the quarter with 13.8 million. It has $971 million in cash, which is not a lot, but is still generating significant positive cash from the business.
Analyst reports have suggested that the real reason for the lower profits is due to spending on subscriber acquisition activity.
On the other side of the equation, DirecTV, which has only just been announced as the new long term DTH supplier for AT&T, had figures which suffered by comparison with its previous year’s figures, due to it being dropped, albeit temporarily, while AT&T was making up its mind.
Despite this DirecTV showed an increase in net income to $363 million up 14%, and a 15% revenue hike to $4.98 billion or the quarter. But it only added 156,000 net video subscribers, down 35% on the same quarter last year, attributed to no further AT&T sales.
It may all be a storm over nothing, and perhaps DirecTV will end up losing out once U-Verse, the AT&T IPTV offering gets into the millions of customers, but it seems to us that AT&T is distorting the market by first using DirecTV to damage Dish, and then later it may convert all those customers it has back into U-verse customers.
We have to ask if there are any anti-trust issues which might come back to bite it once the new administration comes into power, and especially if there is a new man at the FCC.
We think it is already impossible for AT&T to buy DirecTV without there being anti-trust issues, because it would shift 17.3 million homes into AT&T’s pocket, most of them additional to the few million it has already. Overnight it would be the second largest pay TV operator in the US, using its monopoly in fixed lines, its leadership in both broadband and wireless it will then have grabbed a leadership position in pay TV, simply because it has the ability to market to this to the same band of customers.
Any slightly liberal Presidential regime is going to block any such merger, in which case for the next five (or potentially ten) years it will only have the option of growing U-Verse at the eventual expense of ALL of the DTH suppliers, including its current partner DirecTV.
DirecTV this quarter said that it had acquired subscribers, got its existing ARPU up and had lower capital expenses.
“We are in a tough economy and a competitive environment,” Chief Executive Chase Carey said in a conference call with analysts. But business has been good so far and, “overall, the impact is marginal,” he said.
This time last year DirecTV added some 80,000 more subscribers in the quarter at 240,000. Given that at the time it had a deal with Bellsouth, covering roughly half of the US States that its new deal will cover, AT&T might in future be responsible for as many as 160,000 new subscribers and the company might attract as many as 320,000 a quarter once its new deal with AT&T gets fully under way.
At that rate DirecTV will be leaving Dish behind at a rate somewhere close to 1.7 million subscribers a year. Ouch.