When we were quite small we were first told there are two sides to every story. While we see a great future for TiVo after its landmark $500 million settlement with Dish Networks and related supplier EchoStar, the US financial market had eyes only for the other side of the story, the rising value of Dish, now that there is no longer a chance that it would have to switch off 4 million DVRs.
We’re never sure why anyone would ever think that was a possibility ‘ sure it’s what the court case called for, but it offers too great an opportunity for TiVo to gather a huge amount of licensing cash and to secure future licensing revenues from others that don’t want to be under the same scrutiny as Dish. A settlement was always going to happen unless Dish won, and that never looked like happening.
But with this negative finally, inexorably removed, the various Dish upsides became compelling, the best of which was its strong quarterly result, but when added to Dish’s purchase of Blockbuster, its previous auction wins in UHF spectrum, its recent purchase of DBSD with its MSS spectrum and functioning satellite, and its debt liens on further MSS spectrum, combined with the potential of a tight relationship in the future with TiVo, it all became too much for investors not to sit up and notice and the stock added over $1 billion or 20%, in a single afternoon.
This week Dish brought in quarterly revenues of $3.22 billion, up 5.5%, a massive improvement in net income to $549 million and added 58,000 subscribers to end with 14.2 million, when in previous quarters it has been losing customers .
We have tried at Faultline to outguess the community here, and work out just HOW those other things ‘ Blockbuster, TiVo license and Spectrum – can come together into some new direction for Dish, and we can’t quite see it. The reason we can’t quite see it is because, as is clear from the Q&A around the Dish results, even Charlie Ergen can’t quite see it either. Charlie is a mean poker player and the told analysts that Dish has a hard plan to bring all of these components together, but then he undermines that by pointing out that every time a major networking company makes a move ‘ AT&T bids for T-Mobile USA for instance ‘ it changes the landscape and it means he has to keep his powder dry and adjust the plan.
There are two ways to think about the potential ‘ either Dish has a plan to bring all these together, and it just needs to secure the right partners, the right funds and the wait for the right time or it has hardly a plan at all, and wants us all to think that it has one, so that it can bluff its poker hand ‘ in other words resell the businesses that it has acquired, at a nice profit.
We happen to think that the truth lies somewhere in the middle and it may well have a fairly firm plan for Blockbuster, and may get some benefits out of finally licensing the TiVo patents, but on the spectrum front it’s likely that it has a plan A, a plan B and a fallback plan at least.
Let’s just pull out a few choice comments from Ergen and his team from the Seeking Alpha transcript of the results Q&A and see where it leads us.
First off ‘Yes there is a Masterplan’
Second ‘it is unlikely that we would do something in wireless without somebody who is more of an expert in that business than we are.’
On the subject of Netflix, ‘I don’t see Blockbuster necessarily being a direct competitor to Netflix, because Netflix has a formidable and probably insurmountable lead. On the other hand, it may not be the best economic model for studios, and Blockbuster can indirectly provide competition by presenting a better financial model for studios.’
On the subject of how many Blockbuster stores Dish keeps open, ‘It depends on studio participation. If studios want a physical presence, I think there’s a lot of reasons to keep the store open.’ He talked any number between the 1,700 that he has acquired and the 370 that are profitable and clearly has a plan to talk to Studios about vertical marketing booths within the stores and within the inline service.
On the subject of cord cutting ”you can’t turn your TV on without seeing a $29 offer or a $19 offer from somebody who is probably getting close to $80, $90 to $100 in ARPU, so I think everybody is looking around.’
Clearly Ergen understands that in order to fight cord cutting, pay TV is going to be in an ARPU war against online video. He knows the game is going to change and he’s an expert in satellite models so how does he go about leveraging that expertise without getting out of his depth in a big build out of LTE services in the same way as Lightsquared and Clearwire?
His answer was to compare it all to a ‘Seinfeld’ episode, the cult comedy classic featuring Jerry Seinfeld. His point is that there are 28 minutes of different strands being developed in a single Seinfeld show and the viewer cannot see where they are all going, but in the last 2 minutes these strands are all aligned and tied off. His strategy is something like that.
Just ponder possibilities for a moment. The S-Band spectrum that he has from DBSD, along its the impressive G1 satellite, can do many things. It has permission to use an Ancillary Terrestrial Component, so technically it has to use both satellite delivery and terrestrial delivery in a single network. And yet Lightsquared with its L-Band spectrum has got permission to offer handsets that can ONLY see the terrestrial component, so these services (if Dish were also to get a similar FCC waiver) can be separated. What’s to stop Dish offering broadcast services, either conventional audio radio or video, in the satellite component, and leasing the ATC terrestrial element to bolster Lightsquared cellular and broadband capability? DBSD says that it could delivery up to 15 TV channels in its spectrum with its current technology.
That satellite delivery could be modulated to be received by a handset (using DVB-SH which both DBSD and Dish have trialed in the past) or something like ATSC M/H from a satellite. There have been a satellite version of ATSC since 2003, so this has to be possible. If ATSC M/H handsets come into play, all they would have to be able to do is receive the 2 GHz MSS spectrum and Dish then could do this. It could rent the ATC to Lightsquared and DBSD even has some pre-built ATC sites about the US that it could hand over.
But this begs the question of what Dish is going to do with its UHF spectrum. There are lots of ways it can leverage its auction win of channel 56 in all but the top 5 US markets (which Qualcomm’s MediaFLO won and sold on to AT&T).
It is becoming clearer and clearer that LTE as a technology can harness pretty much any spectrum it likes, and use different up and down channels, and doesn’t need contiguous spectrum in order to build an effective network. This has been facilitated by Qualcomm’s promise to AT&T to build out technology for carrier aggregation within LTE, which is the process whereby multiple spectrum pieces can be used to upload data to phones, especially responses to wireless broadband requests. So if Qualcomm delivers on carrier aggregation then those chips would make the UHF spectrum capable of delivering wireless broadband downloads. This could be sent from a satellite and a partner like Lightsquared might build this into its wholesale network, if it chooses to work with Dish on its other spectrum, any other major US cellular operator might also use it.
But UHF has traditionally been used to broadcast TV from terrestrial towers (the US military use UHF from satellites from control apps too so satellite UHF is feasible but not practical). It’s just a thought but AT&T, which acquired MediaFLO for its spectrum, has the old MediaFLO network of working UHF broadcast transmitters in neighboring Channel 55, and it has absolutely no use for it. It could sell it to Dish, if Dish could find a reason to work with AT&T, or a service it could offer in return on the system.
Overnight Dish could leave AT&T with Channel 55 for LTE carrier aggregation, but take the transmission network off its hands, and give it back a service very like FLO, for almost no cost. Just to be really obscure it could even offer the same content from the sky in S-Band and from the ground in UHF.
For the most part Dish has enough content, some of it re-contracted for delivery over networks other than satellite, to devices other than fixed set tops. A tablet broadcast service like this would, of course need new chips inside the device ‘ but these could be anything ‘ LTE carrier aggregation chips for individual internet streams or it could rely on ATSC M/H as a modulation, which, as we have said before, may suddenly emerge in abundance in the US. What would happen for instance if Apple decided to back ATSC M/H first? Suddenly local TV could be delivered on an iPhone or iPad and every operator and handset maker would have to follow suit. Second generation content for ATSC M/H would have to target portable pay TV, and this could be delivered from either a satellite or through an adaptation of the defunct MediaFLO transmitters.
We understand Ergen’s concerns ‘ the company has to stick to its knitting and not get dragged into the niceties of LTE, but somehow find its way onto LTE platforms, and tablets in particular, with internet delivered content (to compete with Netflix) and direct broadcast content (to leverage its spectrum).
Sudden changes to the landscape do make this like a Seinfeld episode – changes such as AT&T buying or being denied the right to buy T-Mobile, or being told it can, but only under certain conditions, such as offloading certain assets.
Clearwire may suddenly find itself at the end of its funding and have to make desperate moves and Lightsquared needs all the assets it can get. So to have too inflexible a strategy would be dangerous.
One strategy we have heard is that all of the Dish channels get aligned with Liberty Media assets, to be delivered in parallel with the Sirius XM services. Liberty holds 40% of Sirius XM the unified US satellite radio company, but it has only two slices of spectrum and little space for delivering video, the specialism of Liberty Media. Dish was at the head of the queue of creditors if Sirius had ever defaulted on its loans, and Dish would surely have acquired it in the same way it has acquired Blockbuster, had not Liberty stepped in with a $530 million rescue plan.
Revisiting that defeat, could not Dish join the party, offering spectrum enough for video delivery to be added to tablets and smartphones, and effectively join all (or just some of) the brands together for such a service ‘ Liberty, Dish, Blockbuster and Sirius XM, to provide a portable video service with Liberty, Blockbuster and Dish content rights.
Finally, even if Dish could get some of these strategies working, to us it has just one slice too many of spectrum. The MSS DBSD spectrum might be enough but Dish holds lien on the spectrum of the bankrupt Terrestar. But if AT&T wanted yet another slice of spectrum when it bought FLO TV from Qualcomm, then without the purchase of T-Mobile, it might want even more UHF spectrum, and that which Dish holds is contiguous with the FLO spectrum.
Ergen’s constant mention of studios and asides about ‘a la carte’ channel options, suggests a role for studios to use Blockbuster as a store for creating their own sell through both at the store, but perhaps also using one of the many potential delivery options ‘ Dish itself, Blockbuster, online and over the air video services.
Like any Seinfeld show, it will all be obvious why each step was taken, once we reach the end of the show, and the outcome will depend on twists and turns in the market, but there are enough uncertainties in the market that we shouldn’t be able to guess the outcome right now ‘ and neither could Ergen, he just knows there is a good one there if he can find it.
DBSD spectrum could also be used to bid for government contracts on homeland security and disaster support services ‘ it delivered emergency disaster relief in response to the 2010 Haitian earthquake demonstrating the flexibility of the G1 satellite, one of the most sophisticated satellites ever launched. It created a specialist Haitian beam for the duration of the disaster, without affecting any other services.
Finally whatever it is that Dish plans, its subsidiary, Dish DBS Corp is about to issue a $2 billion debt security in the form of 6.75% Senior Notes due 2021, so it will have an extra $2 billion in its pocket to pursue any strategy that needs some build out.