What's Behind Dish's Biggest Pay TV Subscriber Loss?

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"Satellite TV technology is losing its currency faster than anyone would have predicted," says one analyst, while another Wall Street observer says, "This seems to be Charlie [Ergen]'s strategy."

Charlie Ergen's Dish Network on Thursday surprised Wall Street with its biggest quarterly pay TV subscriber decline ever, posting a drop of 281,000 for the April-June period, marking 200,000 more losses than in the year-ago period.

The company's previous high for a quarterly sub loss had been 156,000 in the fourth quarter of 2010, according to Leichtman Research Group founder Bruce Leichtman. Wall Street had on average expected a subscriber decline of around 91,000. In addition, Dish posted its first quarter of broadband subscriber losses. The company's stock was down 3 percent in early Thursday trading, but my midday was up more than 1 percent, showing investors weren't too concerned.

But what's behind the surprise figures?

The pay TV industry tends to see seasonally weaker sub trends during the second quarter, when college students go home for the summer and turn off pay TV services and "snowbirds," or people who spend the winter in Florida instead of Northern states, do the same. But Dish's much bigger subscriber loss than the one it had recorded for the second quarter of 2015 shows that there are other drivers.

Dish has since June been engaged in a carriage dispute with Tribune Media that has seen 42 TV stations and the WGN America cable network go dark. Several analysts said that was likely a contributing factor, but by far the only one. No one immediately had estimates for how many sub losses were related to that showdown. "We cannot predict with any certainty the impact of such removal on our business, results of operations and financial condition," Dish itself said Thursday.

Wall Street folks had different views about what main factors to blame for the Dish subscriber surprise and whether it was a sign of fundamental challenges for the company or a strategic refocusing.

"Satellite TV technology is losing its currency faster than anyone would have predicted," MoffettNathanson analyst Craig Moffett tells The Hollywood Reporter in pointing his finger at a fundamental challenge for Dish. "It’s a one-way broadcast-only technology in an increasingly two-way interactive world." Observers also highlighted that cable giants like Comcast and Charter Communications last quarter posted pay TV subscriber gains in a possible sign that the balance of power is shifting from satellite to cable.

Dish itself in a regulatory filing on Thursday admitted that it has been hit by "increased competitive pressures, including aggressive marketing, bundled discount offers combining broadband, video and/or wireless services and other discounted promotional offers, as well as cord cutting."

In a note to investors, Moffett later shared a bearish outlook. “By now, it is widely understood that the sand is running out of Dish’s satellite TV hourglass,” which was “once considered a 'better mousetrap' for video delivery,” he wrote. “Dish’s dismal second-quarter results in their core business, with what was by far their worst-ever subscriber loss, suggest that there is less sand in the hourglass faster than we thought.”

Trying to analyze trends in Dish's traditional satellite TV business and at streaming service Sling TV, which offers smaller bundles of channels at a lower price, he estimated Sling TV added only 49,000 subs in the second quarter. “Unpack the ugly headline number — remember, Dish combines the core with Sling TV, two fundamentally different businesses — and the hits just keep on coming,” said Moffett. “Over the past year, gains at Sling TV have softened the blow of losses in the satellite core. This time, combining the two businesses likely obscures how quickly Sling TV is hitting a wall.”

He concluded: “For a one-year-old OTT service [Sling], that [49,000 subscriber gain] may be an even more alarming result than the huge 330,000 subscriber loss that same Sling TV result implies for the core satellite TV business.”

Wells Fargo analyst Marci Ryvicker, meanwhile, sounded less worried about the fundamental business outlook for Dish, instead blaming stricter credit and other policies that Dish has started using when acquiring subscribers. "To us, this quarter shows a consistent strategy," she said in a report entitled "Big Sub Miss — But This Seems to Be Charlie's Strategy." "It is beyond apparent ... that Dish is focused on profitability at the expense of subs, especially given the aggressive competitive environment."

Tuna Amobi, analyst at S&P Capital IQ, also saw no reason to panic. "The subscriber losses were negatively impacted by higher churn related to ongoing carriage disputes [with Tribune Media and NFL Network], combined with competitive pressures and involuntary disconnects related to higher-quality subscribers," he said.

Dish, traditionally known for targeting more budget-conscious consumers, itself in its filing similarly said: ''Our strategy has included an increased emphasis on acquiring and retaining higher-quality subscribers, even if it means that we will acquire and retain fewer overall subscribers."

In a sign that satellite TV isn't losing subscribers across the board, AT&T later on Thursday reported that its DirecTV unit added 342,000 new subscribers in the second quarter.

Leichtman had yet another explanation for the Dish figures that fell between Ryvicker and Moffett's arguments, saying they were "largely a combination of a change in [company] strategy coupled with the pay TV market environment."

"Dish is far more focused on acquiring and retaining “valuable” subscribers for the [satellite TV] service than they ever were before," he told THR. "This means getting customers who are going to spend more and stay with them longer [rather than deal chasers]." The good news that he says may have been missed amid the subscriber decline was that Dish in the quarter recorded nearly a $90 per month average revenue per user, including Sling subs, which Leichtman says is its highest level ever and up 11 percent from three years ago. "And their subscriber acquisition cost [including Sling] is at about the same level as five years ago," he added.

But Leichtman also highlighted: "These changes in strategy — including the introduction of Sling TV — are related to the pay TV market as a whole, which is saturated since 2012 and in slow decline."

Wall Street observers said they will closely watch AT&T/DirecTV's latest figures after the market close on Thursday and trends at other pay TV firms in the coming week and beyond as they analyze whether others are benefiting from the weaker momentum at Dish.

The results are likely to cause cord cutting and will likely be topics in focus again this earnings season. But Leichtman says about the pay TV industry: "The challenge is not really 'cord-cutters' — the rate of those exiting the category is not far different than it was a decade ago — it’s that those entering/reentering the market have significantly slowed, both a function of internet-delivered alternatives and companies like Dish being less likely to chase subs than in the past."