Dish Network Corp. Monday posted the first quarterly subscriber losses ever reported by a major U.S. satellite-TV provider. The results highlight a strategic problem that is prompting Chairman and Chief Executive Charles Ergen to weigh another attempt to merge with rival DirecTV Group Inc., people familiar with the matter say..
After an unbroken string of subscriber gains since Dish Network launched its service 12 years ago, the company said that its customer base shrank by 25,000 subscribers amid a weaker-than-expected financial performance in the second quarter. The No. 2 satellite-TV service faces escalating pressure to devise a new survival strategy in the face of tough competition not just from DirecTV, but also from cable providers and telecom firms offering TV service.
Now, people familiar with the matter say, Mr. Ergen appears to be positioning Dish for a major strategic shift that may involve reviving attempts to combine Dish and DirecTV. Mr. Ergen previously attempted to do such a deal in 2001, when he tried to acquire DirecTV's then-owner, Hughes Electronics Corp. But regulatory opposition from the Justice Department, the Federal Communications Commission and several states caused Mr. Ergen to abandon the deal.
Today, Mr. Ergen thinks the environment may be more receptive for a Dish-DirecTV deal -- primarily because federal regulators just signed off on a similar deal, the combination of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. (See related Heard on the Street commentary.) In that case, the companies argued that their merger should be allowed because they compete not just with each other, but a wide range of entertainment offerings. Similarly, Dish and DirecTV today could argue that they face competition from across the cable and telecom industries in addition to each other.
Even so, any merger discussions with DirecTV -- which now is controlled by John Malone, a longtime social acquaintance and business associate of Mr. Ergen -- are likely to be long and complicated, while still facing significant antitrust hurdles. Though Dish executives and those representing DirecTV have had some general discussions about the idea in recent months, people close to the matter say no formal proposals have been made.
Yet analysts believe that Mr. Ergen's other obvious strategic option -- selling Dish to AT&T Inc., or another telecommunications company -- seems less likely based on the last quarter's dismal financial results. Blaming poor economic conditions, signal theft and "aggressive promotional offerings" by competitors, the Englewood, Colo., company is scrambling harder than ever to catch up in the areas of customer retention and profitable high-definition programming.
Dish reported a 50% increase in net income to $335.9 million, or 73 cents a share, versus $224.2 million, or 50 cents a share, a year earlier. Revenue climbed 5.6% to $2.91 billion. However, customer retention statistics worsened and the company said reversing that trend would cut into future earnings and cash flow. Craig Moffett, an analyst at Sanford C. Bernstein & Co., said the company is "on the brink" of decline because "each and every [financial] metric was weak." At this point, he said, "it is not obvious [that Dish is] an attractive candidate for anyone."
In 4 p.m. Nasdaq Stock Market composite trading Dish shares fell $1.05, or 3.6%, to $27.91.
Mr. Ergen -- whose company has increasingly wilted in the face of revved-up competition -- has done little to discourage analysts or investors from pondering the benefits of a potential merger. According to people close to Mr. Ergen, the Dish chief recently told associates he still harbors dreams of eventually masterminding such a deal with DirecTV and persuading antitrust enforcers to approve it.
"A gambling man would bet it happens, and maybe during the next couple of years," says Jimmy Schaeffler, chairman of Carmel Group, a Monterey, Calif., consulting firm.
Representatives of Dish and DirecTV, in which Mr. Malone holds a 48% stake through his Liberty Media Corp. unit, have declined to comment on the matter. "Liberty thinks a DirecTV and Dish merger is worth exploring, but is unsure of the antitrust issues," said Greg Maffei, Liberty Media's chief executive.
Until recently, Dish's lower-cost programming packages and shrewd marketing by Mr. Ergen often bested DirecTV in snaring the most new satellite subscribers. In the year-ago quarter, Dish landed 170,000 net additional subscribers. During a conference call with analysts Monday, Mr. Ergen said the company "got wobbly in terms of execution" at least a year ago, but it is now "delivering a better customer experience" than in the first quarter. "We have confidence that we can still grow," he said.
DirecTV, which is faring better in gaining subscribers, is expected to report a net gain of 130,000 subscribers during the second quarter when it announces results Thursday. During the first quarter, DirecTV snared 275,000 net subscribers.
With more than 17 million subscribers and annual revenue topping $17 billion, DirecTV has been extending its lead over the Dish network's nearly 14 million subscribers and corresponding revenue of more than $11 billion. But to maintain DirecTV's momentum, Liberty Media officials realize they also need to make some strategic moves over the next few years.
Both satellite players confront revitalized cable operators and telecommunications giants such as AT&T and Verizon Communications Inc., which are spending billions of dollars to roll out competing television and movie distribution systems. AT&T gained more than 173,000 net video subscribers in the latest quarter. Satellite providers so far haven't been able to keep pace, largely because they can't appeal to customers by offering matching bundles of entertainment, Internet connections and phone services.
In the past few months, according to people familiar with his thinking, Mr. Ergen has calculated the potential savings and synergies of a merger at up to $2 billion annually, mostly through pooling of satellite assets, customer-service operations and marketing expenditures. Mr. Ergen envisions that a single satellite provider would have the scale and financial resources to market something neither Dish nor DirecTV has been able to muster individually: a potent broadband offering.
Such a deal could pass antitrust muster, according to Mr. Ergen's argument, because customers in urban and other areas would end up receiving an important new service option. In rural regions, where satellite antennas today typically are the only way to receive pay-TV options, a merged satellite entity could assuage fears about reduced competition by pledging to peg monthly charges to the lowest fees paid by subscribers anywhere across the country.
Despite all the chatter and industry maneuvering, nothing dramatic is likely to occur until after the November elections. "You don't want to waste a lot of time when you don't know who the ultimate decision makers are going to be," said Beau Buffier, an attorney with Shearman & Sterling.
By: Andy Pasztor & Vishesh Kumar
Wall Street Journal; August 5, 2008
