by Tom Taulli | May 9, 2013 12:51 pm
Dish Network (NASDAQ:DISH) needs some way to change the channel on profits, and fast.
DISH shares were down roughly 3% Thursday after the company announced a lackluster first quarter. Revenues declined marginally year-over-year to $3.56 billion, but profits fell off a cliff, down 40% to $216 million. Both numbers fell short of Street expectations for $3.61 billion and $245 million, respectively.
Dish’s core pay-TV business is not only fairly mature, but is facing a growing field of competition — satellite rival DirecTV (NASDAQ:DTV) and traditional cable providers like Time Warner Cable (NYSE:TWC) and Comcast (NASDAQ:CMCSA) have been joined in the fray by telecom giants AT&T (NYSE:T) and Verizon (NYSE:VZ), which can offer attractive bundles of services and have been getting aggressive on pricing and promotions. Not to mention the growing horde on the streaming front, a la Netflix (NASDAQ:NFLX) and Hulu, among others.
As a result, Dish’s subscriber numbers have been anemic. For Q1, they increased by only 36,000 — down from growth of 104,000 in the year-ago period. At the same time, subscriber costs increased about 8.5% to $1.91 billion — partly because of rising marketing costs, but also because Dish had to shell out for increasingly pricey premium content.
Dish desperately needs to find other avenues for growth if it wants to remain profitable, and to that end, the company in April made a $25.5 billion bid to buyout wireless communications company Sprint (NYSE:S), competing with Japan’s Softbank (PINK:SFTBF) for possession of America’s No. 3 wireless provider.
The deal would bring the winner a nationwide network and a subscriber base of 55 million — significantly increasing Dish’s current base of 14 million. However, Dish also could look at several interesting brands that cater to niche markets like Virgin Mobile USA, Boost Mobile and Assurance Wireless.
Of course, the quirk of a Dish-Sprint deal (or any Dish-wireless deal) would be that their subscriber bases are apples and oranges — they use different networks for different services. So one thing you probably couldn’t count much on is any meaningful cost savings from a deal.
But Dish isn’t gunning for cost savings — it’s going after another avenue for growth, and a way to compete with the Comcasts and Verizons of the world who are able to bundle more services on top of pay-TV.
However, a deal would be extremely risky, as Dish already has about $14.2 billion in total outstanding debt and would need to raise another $12.1 billion to buy Sprint. Yes, interest rates are low — all the more reason to go sniffing for an acquisition — but if Dish’s core business continued to decline after the fact, it would be in a precarious position, left with fewer resources to devote to marketing and improving its content options.
Not to mention, the mobile business isn’t exactly easy pickings. Competing against the virtual duopoly of AT&T and Verizon has forced most other providers to a low-cost, low-margin way of life to stay alive — doubly difficult when you consider the expenses of maintaining the most up-to-date networks.
But Dish has very few options left, and Sprint looks to be the best of those still on the table.
That’s not any solace to investors. Even if a Sprint deal does go through and turn things around, it’ll take some time to get to that point. And meanwhile, DISH shares already are fetching a high valuation of 27 times earnings, making the stock an expensive gamble.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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