Well over 30 years ago, when my dad was running a small TV repair shop in Kitredge, Colorado, he had a very strange visitor—a character named Charlie Ergen, who was driving around pulling a satellite dish behind his vehicle.
Ergen was trying to sell my dad and others on a new technology called satellite television. He succeeded and started a company called Echosphere, or EchoStar, which eventually evolved into Dish Network (NASDAQ: DISH), one of the satellite TV providers that average Americans love to hate.
Naturally, all those people that send Dish a monthly subscription will be wondering if the company is making money. Others are probably wondering if the rise of streaming video is harming Dish by taking its customers away.
What is interesting is that Dish does seem to be making a bit of money right now. The popular hatred of satellite TV providers and the growth of streaming video does not seem to have hurt Dish yet.
Dish Does Make Money
Dish reported a net income of $1.282 billion on September 30, 2015, up from $822.8 million a year earlier. That makes for an increase of around $457.2 million, which is very impressive.
Income was only one of a number of impressive numbers that Dish delivered on September 30, 2015, including the following:
- A free cash flow of $522.32 million
- A profit margin of 5.26%
- A diluted earnings per share number of 2.763
- A return on equity of 56.38%
- A TTM revenue of $14.97 billion
- Cash and short-term investments of $1.613 billion
- $2.851 billion in cash from operations
These figures show us that Dish’s subscriptions do generate quite a bit of float. The business model is working for now because revenues have increased dramatically in recent years.
In September 2013 Dish reported a TTM revenue of $12.87 billion that grew to $14.5 billion in September 2014 and $14.97 billion a year later. That indicates that the revenue growth is slowing, which points to future problems.
Dish’s Big Problem
The biggest problem at Dish is shown by its number of subscriptions, which has started to fall, according to our friends at Statista. In 2012 Dish had 13.97 million subscribers. That grew to 14.06 million in 2013, stayed flat at the same number in 2014 and fell slightly to 13.98 million in 2014.
Observers will notice a serious disconnect between Dish’s subscriptions and its revenue. The number of subscriptions is falling as revenues increase, which indicates that the revenue increase is based upon a rate increase, which is bad. The danger with rate increases is that they drive subscribers away.
Subscription-based services like Dish can only safely get away with rate increases when they have no serious competition. The problem is that Dish has some very aggressive competition in the form of streaming video services. These services sell the same product Dish does—television—in a cheaper and more convenient form.
This threatens Dish because most people only watch specific kinds of programming on television. A wrestling fan can get his grappling fix by subscribing to WWE Network for just $9.99 a month and avoid paying $50 to $100 a month to Dish for dozens of channels he does not watch. A drama addict can simply download the three or four shows she really likes from Amazon or Netflix for a couple of bucks an episode and throw her dish away.
There are two ways Dish can deal with this threat. It can either raise its rates and make its money off those couch potatoes that do not want to abandon traditional television or cut the rates in hopes of attracting new viewers. The limitation to the first strategy is obvious; there is no real growth and limited income prospects. Dish will end up with a declining base of older, less sophisticated and less affluent viewers just like network television or newspapers.
The big danger here is that Dish will end up in a position where the only way it can increase its revenue is to keep raising rates. Sooner or later it will hit a point where subscribers refuse to pay the higher rates. The subscriber base starts shrinking as the rates increase; eventually revenues fall, and the float disappears.
Another option Dish has is to make its rates so low that subscribers will feel little or no pain. The problem here is that the rate needed to generate large numbers of new subscriptions might be high enough to cover the expenses. Dish has fairly high expenses because of the cost of launching and maintaining satellites.
This places Dish in a difficult situation. The company has the choice of either increasing its revenue or growing its business. It cannot do both, because of changing technologies.
My take is that Dish’s prices, income and revenues will keep growing for a few years as its subscriber base keeps falling. Unfortunately, it will reach a point where it cannot raise rates, which is when the revenues will start falling dramatically. That will probably come in 2017 or 2018.
Dish should keep making money and generating cash for another two to three years. Then it will have to find a new business model or find itself in the death spiral. That means investors should be leery of this stock. It’s a cash cow right now, but it will not stay that way.