As kids cut the cord, Dish Network looks online
By Dan Mitchell, contributor
FORTUNE — Young people are increasingly opting not to pay for television. And Dish Network’s Chairman, Charles Ergen, is one of the few pay-TV executives willing to publicly confront the problem. The question is whether he can do much about it given the pressures he’s under, particularly from stockholders who don’t want him spending a lot of money to hedge against the inevitable loss of subscribers.
Ergen took on the issue head-on this week. Younger viewers, who grew up with the Internet, “go to Hulu, and they go to network programming from Hulu, and they get Netflix (NFLX)…,” Ergen told analysts during Dish’s (DISH) earnings call on Monday.
What he didn’t say was that cable companies have been better able (so far, anyway) to hold on to younger viewers because they can bundle TV service with Internet access. Satellite providers can’t. So Dish is trying to come up with ways to capture Internet viewers — both those who already subscribe to Dish and, increasingly, those who don’t.
The problem is, every option is expensive. That’s why stockholders sent Dish shares higher after its disappointing earnings announcement. The company declared a special dividend, “helping to allay some investors’ fears of reckless spending,” according to Tiernan Ray of Barron’s.
That “reckless spending” would have been building out a wireless broadband network, one of several initiatives the company is pursuing. No big money was invested on such a project in the third quarter, even as Dish continued to lose subscribers, so investors cheered. Shares continued to rise on Wednesday, even as the broader market — and tech stocks in particular — fell hard. Shares were up about 5.4% on Wednesday from Monday’s open, and more than 1% on a day when the Nasdaq was down 2.4%.
Dish revenue rose 12.3% in the quarter, to $3.6 billion, missing expectations. Profits rose 30%, to $319.1 million. The company lost 111,000 subscribers over the quarter, leaving it with 13.9 million.
Dish announced plans in August for a nationwide broadband wireless network. So far, though, it’s unclear precisely what the company is going to do, and when. Uncertainties abound — not the least of which is what might happen with AT&T’s (T) proposed acquisition of T-Mobile, under challenge by the feds — but such a network, while costing billions of dollars, would give Dish something similar to what the cable companies have with their ISP services: an investment in the future of television.
The other part of the strategy is Internet video. Dish earlier this year purchased the assets of bankrupt Blockbuster and has begun using that brand to roll out a streaming video service to compete with Netflix, Wal-Mart (WMT), Amazon (AMZN) and others.
Uncertainties abound here, too. Netflix might be going through a rough patch, but it has about 20,000 movies available for streaming. Dish has about 3,000, and getting the rights to more will cost a bundle. The company has to take a streaming service that had been “shockingly unpopular” under its previous owners and set it against an increasing number of nimble, well-financed competitors.
Also, Dish is reportedly in the “exploratory” stages of licensing television programming to deploy over the Internet through a pay service. It’s not known how serious the company is about this, nor is there a timeline for when it might happen, but the Wall Street Journal reported Tuesday that Ergen has approached “multiple media companies” with the idea, which could include an “antenna to pick up over-the-air broadcasts of major broadcast TV stations, rather than paying them subscription fees.” Nevertheless, such an initiative would involve Dish writing some pretty big checks.
In the end, though, the company can’t just hope for substantial new growth in satellite subscriptions. It’s not going to happen. And though some shareholders might cheer for a quarter where few investments are made, near-future quarters likely won’t make them happy because Dish is going to have to spend big to avoid being pummeled by the Internet upstarts.