Why DirecTV Won't Compete With Dish's Sling TV

By Markets Fool.com

Options for cord-cutters keep getting better. Last year, HBO and Showtime announced plans to go over-the-top, and other super video-on-demand services continue to get better. Most recently, DISH Network launched Sling TV, an over-the-top streaming service that delivers live network feeds over the Internet. At $20 per month, the slim bundle of channels is quite compelling.

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Dish launched Sling TV in January. Source: DISH Network.

Rival satellite providerDirecTV has been in discussions with content companies since early last year for what it calls a personal streaming service, or PSS. Originally, CEO Mike White wanted to launch a PSS for around $30 per month, but the longer he looks at it, the harder it is for him to justify offering such a service.

Esto no es una paquete Espanol
In December, DirecTV launched Yaveo, a Spanish-language bundle of channels and on-demand content delivered over the Internet. Upon its release, I noted that Yaveo offers a significant opportunity to help DirecTV grow its revenue and earnings, but also lays the groundwork for a more robust personal streaming service down the road.

The key difference between Yaveo and a slim bundle like Sling TV is that Yaveo unbundled a premium offering -- Spanish-language channels. Those bundles typically carry a higher margin than other channels in the typical bundle like ESPN or TNT.

Additionally, the opportunity is easily captured because subscribers are already used to paying separately for Spanish-language channels. The same is true with HBO and Showtime, which means there's some precedence for pricing. Pricing a service like Sling TV is more of an art, and the low-barrier to entry means initial pricing is key. Sling TV took the first shot at $20, which puts a lot of pressure on other potential entrants.

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And that gets to the root of the problem
At $20 per month, Dish Network is probably not making very much money on its Sling TV subscribers. On DirecTV's fourth-quarter earnings call, Mr. White told investors, "It's not clear to me it's a particularly profitable idea."

For DISH Network, it's looking to diversify its product as more subscribers leave its satellite-TV service. Last quarter, Dish lost 63,000 subscribers, and posted its third-straight quarter with net subscriber losses. For the year, the company ended up losing 79,000 after a nearly flat 2013.

In contrast, DirecTV added 149,000 new U.S. subscribers last quarter and 99,000 for the year, after significant subscriber churn in the third quarter. What's more, the company has successfully expanded into Latin America, where it's seeing excellent growth. The company added 903,000 net new subscribers in Latin America paying nearly $50 per month on average.

In other words, DirecTV still has leverage where DISH Network does not. People are leaving the latter's service for the competition, or to cut the cord. Sling TV offers Dish an opportunity to retain those customers, albeit at a lower price and at a lower profit margin.

A similar offer from DirecTV could be dilutive to its brand and cannibalize its business. With the company's expectations for slow-and-steady revenue growth, stable U.S. subscribers and a growing Latin American segment should be able to meet expectations without disrupting its business.

Things could change soon
With the impending merger with AT&T , Mr. White may soon change his stance on over-the-top services. He says, "An important consideration is would I do a broadband-plus idea if we were merged with AT&T ahead of a pure-play, over-the-top kind of idea?"

Being able to control the Internet connection through which the service is delivered opens the door for more profits. That's why I think we'll see Dish try to leverage its spectrum holdings to provide an in-home broadband service. Combining DirecTV's and AT&T's assets and existing relationships with media companies should make an over-the-top streaming service profitable for the combined company.

Until the merger goes through, though, cord cutters and investors shouldn't hold their breath for a Sling TV competitor from DirecTV.

The article Why DirecTV Won't Compete With Dish's Sling TV originally appeared on Fool.com.

Adam Levy has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.