We had suspected that all the bad news about Dish was in the price, but once the results came out this week, with the biggest headline being that it had lost 102,000 subscribers, the beleaguered stock began to fall once more. It has now lost 34% of its value in the past month and its market capitalization is now just $4.31 billion.
What we feel is the critical calculation is not just how fast it is losing subscribers, but how fast it will lose subscribers now that AT&T is no longer batting in its corner.
AT&T brought in 17% of gross subscriber additions during the year and 19% during the fourth quarter. Gross subscribers additions were 2.96 million over 2008 which means that AT&T is responsible for 126,000 gross additions each quarter on average. Given that this is the last quarter when AT&T is still bringing in customers, and that Dish lost 102,000 subscribers (the previous quarter Dish lost just 10,000 subscribers), then we might assume that dish will lose those two numbers added up, going forwards, around 228,000 a quarter as of next quarter, since the relationship has now ended in favor of DirecTV.
Starting with 13.7 million customers, if that fall away happened and Dish did nothing about it, it would end 2009 on around 12.8 million customers, while the DirecTV customer base would grow by something like 350,000 a quarter.
A big part of the problem for Dish is the churn rate. It averaged 1.7% a month during 2007 and the 2008 average was 1.86%. However in the 3rd quarter, Dish cited this as over 2%, and in the fourth quarter it did not come out with a separate monthly figure for the quarter.
Dish is not going to run out of money or customers overnight. It generated $2.19 billion in unencumbered cash last year, it has $559 million in cash and marketable securities and it made $903 million profit for 2008.
But it needs to come up with a plan, and that plan needs to be something new. The company says that it has just introduced a new promotion where qualifying subscribers can get DTH for as little as $9.99 a month for up to six months. We presume that this is really about picking of its fair share of confused customers in the run up to the new analog TV cut off date, in June. It’s far easier to buy a cheap pay TV license than it is to get the new $40 set top box and find someone to install a better aerial, which is often needed.
So presumably this last quarter is Dish’s performance in what must be considered a buoyant pay TV environment (recession aside the DTV switch is driving more cable adds).
Which is what is leading investors to ask ‘What’s it going to be like when all DTV switchovers have happened, the AT&T deal is over and there are no low hanging pay TV fruit.’ Indeed what will happen?
There is no need for the company to panic and there is plenty of time for Dish to find new partners. What for instance was all that bidding to buy out the debt of Sirius XM? which resulted in a rescue of Sirius by Liberty. What about the 700 MHz spectrum Dish bought and what will it use it for, and how will it build it out? It has until 2013 to build out that spectrum so perhaps it is the last thing on its mind right now.
But there is also no need for anyone to hold this stock until CEO and major shareholder Charlie Ergen finds an answer to his predicament which results in net subscriber additions, rather than losses. Our guess is that it may not happen during 2009.