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Dish Seen in DirecTV's Orbit as Growth Stalls, Content Costs Rise

Combining Could Provide Leverage Against TV Networks' Demands

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Stagnating growth and rising content costs are increasing the pressure on Dish Network, the satellite provider in TV networks' crosshairs over its ad-skipping service, to combine with rival DirecTV, 10 years after a failed attempt.

Chairman Charlie Ergen said this week that the two largest U.S. satellite-TV providers "have to consider" a deal, potentially joining a rush of consolidation in the telecommunications, cable and satellite-TV industries that has already topped $46 billion in the U.S. this year, according to data compiled by Bloomberg.

Dish has been fighting for subscribers by letting them 'watch shows, not commercials' with the Hopper set-top box.
Dish has been fighting for subscribers by letting them 'watch shows, not commercials' with the Hopper set-top box.

No discussions between the two companies are happening yet, Mr. Ergen, 59, said during the company's Nov. 6 earnings conference call. But reasons to try again are growing. Dish is facing declining profit this year, and analysts estimate revenue will rise only 7.8% through 2014, less than 95% of the other cable and satellite-TV providers globally.

DirecTV and Dish are also struggling to sign up more U.S. subscribers than they lose, in part because customers are switching to competing services such as AT&T's U-verse, Verizon Communications' Fios and cheaper online alternatives Netflix and Hulu. Amazon is testing a new monthly price structure for its Amazon Prime streaming video service that could attract more customers.

DirecTV posted its first-ever quarterly net loss in customers this year. Dish has reported a drop in four of the last six quarters, including a net loss of 19,000 in the most recent quarter. That's smaller than the 111,000 decline a year earlier, but customer acquisition costs also rose 15% to $453 million as Dish boosted ad spending around its big play to win new subscribers: the Hopper set-top box, which can automatically skip commercials.

Programming costs are meanwhile increasing by a high-single-digit percentage each year as companies such as Walt Disney Co., owner of ESPN, and CBS Corp., home of the namesake broadcast network, push for higher fees.

"It is no secret that the pay-TV industry continues to face a difficult economic environment and a more price-sensitive marketplace," Dish CEO Joseph Clayton said on this week's earnings call. "The entire industry will have to rethink its current business model and strategy."

A Dish-DirecTV deal may help limit increases in customers' TV bills, which can top $100 a month, because the new company, with a combined 34 million U.S. subscribers, may have more leverage in fee negotiations with channel owners, said Chris Marangi, a money manager at Gamco Investors. His firm oversees about $37 billion, including more than 7 million DirecTV shares and more than 6 million Dish shares.

"You've got a challenging content cost environment where consolidation could be pro-consumer," DirecTV Chairman and CEO Mike White said at a Sept. 21 conference. While he wouldn't speculate about a potential tie-up with Dish, he said the industry has changed since the deal was rejected in 2002 as telecommunications firms have expanded across the country.

The Federal Communications Commission also plans to decide whether Dish can use its wireless spectrum to transmit mobile voice and data by year-end, which Sanford C. Bernstein & Co. says could become a catalyst for a takeover of the $16 billion company. With use of the new airwaves, a combined DirecTV-Dish could offer the fast wireless internet connections that regulators are encouraging along with pay-TV, which may help persuade officials to approve a deal they blocked as anticompetitive in 2002.

"Regulators will be more open to a deal given how the industry has changed," said Todd Lowenstein, a money manager at HighMark Capital Management, which owns shares of DirecTV. "It's a dream deal. A deal would really bring a lot of cost savings to the satellite industry, which is a low-growth to no-growth industry."

~Bloomberg News~

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