Dish and the Latest Commercial Killer
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The pay-TV business is becoming an increasingly difficult market in which to operate. A steady uptick in licensing fees, which satellite providers pay for programming, is causing monthly subscription rates for users to also experience meaningful climbs. At the same time, increased competition within the pay-TV market and new alternatives for entertainment-hungry consumers is creating more viewing options than ever before. A huge group of pay-TV cord cutters, which would normally pay an average of around $86/month to subscribe to premium television, can now tune into their favorite programs through a combination of free Internet TV, DVD rental services like those offered through Redbox (NASDAQ: CSTR), and video streaming services like those presented by the current industry leader in Netflix (NASDAQ: NFLX). (Monthly rate average – source: NPD Group, 2011 research).
Redbox’s increase in the number of nationwide rental kiosks and the total number of annual disc rentals of 58% and 85% between 2009 and 2011, respectively, and Netflix boasting a total streaming base of more than 23 million people (despite recent operating debacles) shows that neither of these entertainment options are a passing fancy.
Satellite television provider Dish Network (NASDAQ: DISH) is by no means in the most favorable position as these market forces influence its operations from all angles. The corporation, with slightly more than 14 million U.S. subscribers, currently controls around 15% of the domestic market, and although it has experienced a meaningful jump in revenues and operating margins from mid-recessionary lows, its near-term growth prospects are relatively limited compared to other players in the field.
Dish’s total subscriber base, for example, has increased a mere 2.1% from 2008, which compares to the 35.7% jump in DirecTV’s (NASDAQ: DTV) total base. Although a significant portion of DirecTV’s growth has come from emerging markets in Latin America – subscribers in the market have increased 238% since 2008 – the corporation has increased its domestic base by nearly 13% over the same time period and now controls 20% of the U.S. market.
This being said, Dish has decided to fight the squeeze from both ends through incremental gains in the domestic market via new product features and programming. The corporation recently added 104,000 new subscribers in the most recent quarter, which represented a huge performance improvement over the average analyst estimates of 62,000 new subscriptions in Q1 2012. With its newest DVR offering, the Hopper, Dish has hopes in keeping up the incremental subscriber gains and minimizing its churn, which dropped to 1.35% in Q1 2012 and compares to the 1.47% rate reported in the same period in 2011.
Although the Hopper has been available to subscribers since mid-March, and may also appear to be similar to other DVR offerings on the market, its newest Auto Hop feature will allow Dish users to skip commercials completely on most national prime-time shows aired on major broadcast networks. This compares with the ability to simply fast-forward through such advertisements with traditional DVR technology.
An adequate amount of Hopper subscriber upgrade data has not yet been released, but based on the reactions from broadcast network executives, the product might cause quite a stir in the pay-TV market. Dish CEO Joe Clayton has already made it known that the corporation plans to up its ad spending on the Hopper product by a factor of two to three times what it has historically spent on ad campaigns (most of the Hopper ads will, ironically, be television-based). CBS and NBC executives, as well as their counterpart at Fox, have already stated that they would not run ads for the new Dish DVR on any of their national channels, and because large broadcast networks are the largest content providers to pay-TV distributors like Dish, their reasoning is sound.
The Hopper, despite all of its channel-skipping glory, will obviously not completely kill the effectiveness of television-based ads. Because it is only for use on broadcast programming and does not work on live programs, cable networks and sporting events are immune to the Auto Hop feature. Luckily for large advertising firms, these are two of the niches that are experiencing the largest portion of the increase in total TV ad spend.
U.S. television ad expenditures did enjoy a nice 4.5% increase to $72 billion in 2011, which followed an even more impressive near 10% increase in 2010 (source: Nielsen research). The growth has not been evenly distributed among the individual markets, however. Whereas network TV ads remained flat in 2011 after rebounding from 2009 trough levels, and syndicated/spot ads have continued to lose share over the past several years, cable TV spending has experienced a huge 42% increase since 2007 and is now on par with network TV. The continued rise in television advertising shows that despite the recent surge in Internet and mobile-based ads (which collectively represent only around $6 billion in expenditures per year) and commercial-blocking technology, it is still the most effective means to push a message to a given audience base.
This being said, despite the worrying on the end of the major broadcast networks, will the Hopper make a game-changing splash in the content industry? The product might become a nice upgrade feature for the existing 14 million Dish subscribers, but it is unlikely to enjoy a meaningful conquest into DirecTV or other competitors’ subscriber bases. Traditional DVR technology has caught on extremely fast – around 1.2% of U.S. households owned one in early 2006, compared with 42.2% in early 2011 (source: Nielsen) – and for most people the technology is adequate. Likewise, the huge surge to video streaming category from major players like Apple, Amazon, Google, Comcast, Netflix, and Redbox/Verizon means that more entertainment options are likely to further drive the recent cord-cutting initiatives of past pay-TV subscribers. Dish may have a unique product with an unbeatable “cool factor,” but it is unlikely to add significantly to its top line or make a major disruption in the collective television advertising market.
Competitor DirecTV has shown that the lucrative future of pay-TV is not in gaining incremental subscribers in the mature U.S. market, but systematically attacking the emerging markets that are characterized by the largest increases in the willingness/ability of consumers to pay for premium entertainment. With the corporation highlighting a feasible plan to reap an additional $10 billion in revenues out of these markets over the next several years, investors should be focused on the cheaper DirecTV (8.85x 2013’s EPS estimates) than Dish (10.64x 2013’s EPS estimates).
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