Dish s Take on Cord-Cutting, Carriage Fees, and Sports Offerings

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1 Dish s Take on Cord-Cutting, Carriage Fees, and Sports Offerings By S carlett Ness Mar 26, :58 PM Cord-Cutting Trend Continues to Hurt Dish Network Dish losing pay-tv customers Like all satellite TV providers, Dish Network (DISH) has been losing its pay-tv customers. The stock price of Dish also declined 11.0% in February 2018, as the company struggles with falling demand for subscription-tv packages. In 2017, Dish s pay-tv subscribers totaled 13.2 million, which were down 3.1% YoY (year-overyear). Dish TV lost 995,000 subscribers in 2017, reaching a total subscriber base of ~11.0 million, down 9.4% YoY. Although Dish added 39,000 pay-tv subscribers in 4Q17, it was due to the addition of 75,000 subscribers in P uerto Rico and the US Virgin Islands, where services were disrupted due to Hurricane Maria. Cord-cutting is hurting the pay-tv customer base

2 Traditional satellite TV providers are facing a declining number of pay-tv subscribers, as the demand for OTT (over-the-top) online video streaming service is growing rapidly. Traditional pay-tv companies like C omcast and C harter C ommunications have also been losing video customers due to cord-cutting and competition from OTT players in the industry. AT& T (T), the US s second-largest wireless service provider, lost 147,000 satellite TV customers and 60,000 U-verse TV customers in 4Q17. C onsumers are shifting toward cheaper OTT online video streaming services instead of subscribing to more costly traditional cable or satellite connections. The traditional pay-tv market in the US lost 3.5 million customers in 2017, which was due to the growing demand for OTT video streaming providers like Amazon P rime by Amazon (AMZN), Netflix (NFLX), and YouTube by Alphabet (GOOGL). Looking into the Growing Focus on Dish s Sling TV Customers Dish s growing Sling-TV customers Against a backdrop of a declining pay-tv subscriber base, Dish Network (DISH) has been focusing on its own streaming substitute, Sling-TV, which was launched in In 4Q17, Dish added about 160,000 Sling TV customers, while about 711,000 customers were added to its Sling TV service in fiscal Dish ended 2017 with 2.2 million customers. The total Sling TV customer base increased 47.3% year-over-year (or YoY) from its 2016 numbers of 1.5 million customers. Growing Sling TV services

3 Sling TV services can be streamed on multiple devices such as TVs, tablets, computers, game consoles, and smartphones for $20 per month. Apart from offering Sling International, Sling Latino, and Sling domestic video programming services (Sling Orange and Sling Blue), it also provides add-on extras and pay-per-view events. In December 2016, Sling TV launched a cloud DVR program for customers who subscribe to Sling Orange or Sling Blue services using multiple streaming-capable devices. Usually, subscriber acquisition costs for Sling TV subscribers are significantly lower than those for Dish TV subscribers. In particular, Sling Orange and Blue services are two of the lowest-priced livelinear online streaming services in the industry. Competition intensifies in the OTT TV market C onsumers growing interest in watching online videos has forced TV distributors and programmers to launch online TV offerings in the market. Dish s Sling TV competes with AT& T s (T) DIREC TV NOW in the Internet TV streaming space, which is dominated by Netflix (NFLX), YouTube TV of Alphabet (GOOGL), Hulu Live TV, and Amazon (AMZN) Prime. Can Dish s Sling TV Compete with AT&T s DIRECTV NOW? Sling TV versus DIRECTV NOW Dish Network (DISH) impressed investors after posting a solid Sling TV subscriber base of more than 2.2 million in Dish s Sling TV s customer base in 2017 was more than double the subscriber base of rival AT& T s (T) DIREC TV NOW. In 2017, AT& T s Internet streaming service provider DIREC TV NOW reported a subscriber base of over 1.0 million.

4 Declining growth of Sling TV Sling TV s customer base increased 47.3% year-over-year (or YoY) in 2017 from 1.5 million subscribers in Sling TV reached a remarkable customer base of more than 2.2 million in 2017 by adding nearly 711,000 customers. However, the growth of Dish s online video streaming service slowed down in 2017 from net additions of 878,000 customers in The company witnessed strong Sling TV growth in 2016 from net additions of 526,000 customers in The sluggish growth in Sling TV customers was mainly due to the entry of strong competitors such as DIRECTV NOW, Hulu Live, and Alphabet s (GOOGL) YouTube TV. Both Hulu Live and YouTube TV, which launched in 2017, give fierce competition to Sling TV and DIREC TV NOW, as their services are integrated with technology. Dish Network has been witnessing a decline in its overall subscriber count in the past three years. While Sling TV s Internet streaming services have been adding to the customer base, a decrease in gross additions to its Dish TV services has led to subscriber losses. How Dish Network Is Expanding Its Sports Offerings Dish adds more basketball games Dish Network (DISH) has added more National Basketball Association games to its sports offerings for Sling TV customers. As part of this initiative, Dish Network s Sling TV has added NBA League P ass to its offerings, which gives its subscribers the option to stream all out-of-market games. Sling TV also plans to add Team Pass, where subscribers will be able to watch live games for a particular team throughout the season.

5 Dish s sports offerings Subscribers of Sling s Orange or Blue packages can purchase NBA League P ass for $29 per month, while Team Pass would have a monthly cost of $18 when it goes live. The deal is expected to be the same for Spanish-language subscribers and certain Sling International subscribers. The company s digital streaming services already offer its subscribers access to some Major League Baseball, National Football League, and NBA games. The company also offers packages with ESPN and TNT to its Sling TV customers. The addition of NBA League P ass, along with the optional Team P ass add-on, is expected to enhance its Sling TV customers experience. Further, these offerings are expected to add new subscribers to Sling TV s robust subscriber base. In 2017, Dish s Internet TV streaming services added 711,000 customers. Other peer companies fighting for sports rights Disney (DIS) and Amazon (AMZN) are ramping up their efforts to obtain sports rights for NFL games across its various digital platforms. Disney has paid roughly $2.3 billion for NFL rights on mobile devices. Amazon has spent $50.0 million for live-streaming NFL Thursday night games on the Internet. C omcast (C MC SA) generated enormous revenues from airing the 2018 Winter Olympics, which were held in February. Comcast is now interested in adding Sky to its portfolio. The addition of Sky would give Comcast the TV rights to soccer games, which could result in more sports content for

6 C omcast. However, Disney is in a deal with 21st C entury Fox (FOXA) to acquire some of its assets, including Sky. Dish Network s Declining Revenue Trend in 2017 Dish s revenue trend Dish Network s (DISH) revenues have disappointed in 2017 overall, and its revenues declined in each quarter of In 4Q17, revenues reached ~$3.5 billion, down 7.2% YoY (year-over-year) from 4Q16. Its revenues also declined from $15.2 billion in 2016 to $14.4 billion in Reasons for the revenue decline Dish Network (DISH) has been facing increased pressure from a continuous decline in subscriberrelated revenues. In 2017, subscriber-related revenues declined 5.1% to $14.3 billion. The company s pay-tv subscribers fell by 121,000 in 4Q17 and by more than 400,000 in 2017 over the previous year. The company ended 2017 with 13.2 million subscribers. Declining subscribers at traditional cable service Dish TV have been leading to overall pay-tv subscriber losses. In 2017, the company reached just above 11.0 million Dish TV subscribers. Unlike big telecom players such as AT& T (T) and Verizon (VZ), Dish Network has declined to adopt lucrative bundled deals. These deals include triple-play and quadruple-play services at attractive prices. However, the growth of Sling TV has also slowed down in The growing shift from traditional cable service to low-cost video streaming services, known as cord-cutting, has taken a toll on pay-tv providers. C ustomers have been shifting to watching videos and sports online due to cost considerations.

7 Netflix (NFLX) and Amazon (AMZN) are the leading players among the online streaming service providers. The availability of high-speed Internet services has also changed consumers viewing habits, leading to cord-cutting. Dish Network's Efforts to Maintain a Lower Churn Rate Dish maintaining lower churn trend Dish Network (DISH) has been delivering a lower Dish TV churn rate despite increased pressure from competitors that provide online streaming services. The churn rate for Dish TV was ~1.8% in 2017, which is significantly lower than ~2.0% in A lower Dish TV churn rate helped the company lower its subscriber losses and, in turn, reduce net pay-tv subscriber losses in Initiatives to add or retain customers Dish TV (DISH) is giving priority to its customers requirements and is launching new products, such as its Hopper DVR, to attract customers. The company became the first major pay-tv provider to integrate with Netflix (NFLX) and is the first one to offer hands-free TV with Amazon s (AMZN) Alexa. Dish Network is also planning to incorporate the Hopper with Alphabet s (GOOGL) Google Assistant product. Using Google Assistant, Dish customers would be able to use voice control with their TVs in multiple languages. The company also assists its customers who have antennas to access free local programming and integrate that into the Hopper. The company is also offering programming packages such as Flex

8 Pack. Dish Network s Declining Subscriber Acquisition Cost Trend The cost to acquire new subscribers Dish Network (DISH) incurs significant upfront costs to gain subscribers. The company bears costs such as advertising, marketing expenses, equipment, installation services, and new customer promotions to acquire new customers. Dish Network incurs significant costs to retain its existing Dish TV customers. On the other hand, subscriber acquisition costs are much lower for Dish s subscribers of its Sling TV, which offers Internet streaming services. Declining subscriber acquisition costs As can be seen in the chart above, Dish Network has been facing a decline in subscriber acquisition costs (or SAC) since A decline in subscriber acquisition cost is primarily attributable to the decline in gross new Dish TV subscriber activations and a decrease in Dish TV SAC. The company has been facing a drastic decline in Dish TV subscribers due to the growing popularity and availability of various online streaming options. In addition to Dish Network, the other pay-tv companies are also battling to retain their customers amid the cord-cutting wave. In 2017, Dish lost about 1.2 million satellite television subscribers, but it added about 711,000 customers to its Sling TV service. Increasing demand for low-cost video streaming services from Netflix (NFLX) and Amazon P rime Video (AMZN) has attracted a young urban population. C ompanies like P laystation Vue (SNE) and

9 FuboTV have also entered the market with their own streaming services. Tech giants Apple and Facebook (FB) have started streaming services, adding to the competition in the over-the-top space. How the Carriage Fee Dispute with CBS Affected Dish Network Dish CBS renewal deal Dish Network (DISH) inked a new multiyear licensing agreement with C BS (C BS) in November 2017 after resolving a three-day carriage dispute. According to the renewal deal between the two companies, CBS s local stations have been restored. Plus, new channels such as Showtime, CBS Sports Network, P op, and the Smithsonian C hannel were also added to the company s satellite- TV service. Dish s dispute with CBS According to Dish Network, C BS demanded a high price for its flagship network and affiliated cable stations. According to industry sources, C BS charges the same retransmission fees from other distributors. As Dish Network declined to pay the fee for CBS s channels, CBS withdrew its services for three days during Thanksgiving weekend in Dish subscribers were denied access to C BS s 28 local channels in 18 markets across 26 states, including the Thanksgiving Day NFL game on C BS stations. TV broadcasters and satellite distributors also had a similar dispute in Dish Network faced a similar issue with Lilly Broadcasting, which led to the stoppage of services in Puerto Rico, the US

10 Virgin Islands, and three other markets in P ennsylvania, New York, and Hawaii. However, the company settled its dispute with Lilly Broadcasting in November Growing carriage fee blackout issue C arriage fee disputes have been rising and are subduing subscriber growth. Despite obtaining huge subsidies for the publicly owned TV spectrum, large station owners and media giants are charging increasing fees or blacking out broadcasting content. As a result, satellite distributors are forced to pass these costs to their consumers. Companies facing carriage fee blackout problem In 2017, Cox had withdrawn its services from AT& T (T) and DIRECTV for one day. Verizon (VZ) also dropped Univision s Spanish channels from its Fios TV network. Media giant Walt Disney (DIS) also had a dispute over carriage fees with Altice, the US s fourth-largest cable operator. Will Higher Investments in Spectrum Impact Dish s Debt Levels? Long-term debt trends Dish Network s (DISH) debt levels have risen in the last few years, due to the company s increased investments in acquiring spectrum licenses. In 2017, Dish Network had long-term debt obligations of $16.2 billion, down from $16.5 billion in Dish Network expects to invest in wireless projects, such as deploying a next-generation 5G network and supporting narrow-band IoT (Internet of Things). The company seeks to implement capital spending in the range of $500.0 million $1.0 billion through 2020 in these projects.

11 Spectrum license Dish Network (DISH) has invested more than $11.0 billion in acquiring wireless spectrum licenses and has created an extensive portfolio of spectrum, which is the core component of companies operating a wireless network. Unlike the big four telecom operators Verizon (VZ), AT& T (T), T- Mobile US (TMUS), and Sprint (S), Dish doesn t possess a wireless network that can make use of this spectrum. Dish s portfolio consists of 80 MHz radio frequencies of different bands, which is expected to be used to deploy its 4G LTE wireless network in the top 100 US markets. The company also plans to complete the deployment of its first phase of the next-generation 5G-capable network, which is focused on supporting narrowband IoT, by March The network deployment is further expected to escalate the company s debt. Dish Network is holding unused spectrum holdings worth ~$35.0 billion. However, according to a clause by the FCC, Dish must roll out its wireless service to 70.0% of the population covered by its spectrum by Dish Network is planning to launch an NB-IoT network over 5G to meet the FC C s requirement. However, the company hasn t announced any partnership possibilities yet. How US Tax Reform Benefited Dish Network s Income in 4Q17 Tax reform benefit on Dish s income In 4Q17, Dish Network (DISH) earned net income of ~$1.4 billion. This net income included a onetime income tax gain of $1.2 billion associated with the tax provisions resulting from the Tax Cuts and Jobs Act. According to this tax reform bill, the corporate tax structure has been reduced to 21.0% from the existing 35.0%. Accordingly, the company will consider the federal statutory tax rate of 21.0% going forward.

12 Changes in tax structure The new tax rate will be % on income repatriated to the US, instead of the current 35.0%. The reduction in tax rates has benefited numerous telecom and media companies that have invested their cash overseas. These companies can bring their holdings back for investment in the US. The change in the tax structure is expected to help boost the US economy, raise wages, and add jobs. Telecom behemoth AT& T (T) announced that it plans to expand its US investments by $1.0 billion in The company also rewarded its employees with a special bonus of $1,000 following the announcement of the tax structure revision. Verizon (VZ), Comcast (CMCSA), and Disney (DIS) realized tax gains of about $16.8 billion, $12.7 billion, and $1.6 billion, respectively, on net income for the quarter ended December 2017.