Dish's Sling TV Economics Don't Add Up
If it wasn't for Sling TV, Dish Network (NASDAQ: DISH) would be bleeding subscribers. Instead, the streaming linear TV service has attracted over 1 million subscribers, helping Dish tread water with its overall subscriber numbers. At the end of 2016, Dish reported 13.67 million subscribers across its traditional satellite business and Sling TV. That's down 310,000 or so from two years ago, right before Dish launched Sling TV, but consider how much worse it would be without Sling TV.
Dish Networks' management argues that it can charge so much less for Sling TV (plans start at just $20 per month) because its customer acquisition costs are so much less. There's no need to send a person over to the house to install the satellite dish, or set up in-home equipment, all of which Dish pays for upfront. Sling TV also doesn't offer loss-leading promotional short-term sign-up rates to acquire customers. But even when you factor in the savings, Sling TV customers generate about one-fourth the profit of traditional satellite customers over their lifetime.
Image source: Sling TV.
Subscriber acquisition costs are plummeting, but that's not necessarily good
Annual subscriber acquisition costs per subscriber are down 25% over the last two years. In the fourth quarter, that number fell to about $536, down from about $853 in 2014. That's not entirely due to the influx of Sling TV subscribers, but multiple times throughout its annual report, management notes, "As Sling branded pay-TV subscriber activations increase, it will have a positive impact on subscriber acquisition costs."
The trend in subscriber acquisition costs indicates that most of Dish's gross additions are Sling TV subscribers. The problem is, Sling may be cannibalizing Dish's satellite business -- i.e., customers Dish has already acquired. In that case, Dish isn't saving any money on customers switching to Sling. They're just replacing a higher revenue stream with a lower one.
Analyst Craig Moffett says each time Dish replaces a satellite customer with a Sling customer, "they forgo a future stream of contribution dollars equal to about $1,950 ... In the substitute OTT subscriber, they gain a future contribution stream worth about $325, and they incur upfront cost of about $55." Those values are based on the average customer life for both satellite and Sling TV.
Even if Dish isn't directly cannibalizing itself (with its satellite customers dropping the dish for Sling), the trend is for Sling TV subscribers replacing Dish. The effect is still the same.
Will the competition fair any better?
Several big competitors have entered or are planning to enter the streaming linear TV market. AT&T (NYSE: T) launched DirecTV Now late last year and has already attracted some 400,000 subscribers, according to one media executive. Verizon (NYSE: VZ) is also interested in launching a nationwide streaming service this year.
The big difference between Dish Network and AT&T and Verizon is that the latter two don't rely on video subscriptions for the bulk of their revenue. AT&T and Verizon's streaming services will support their core wireless service businesses through bundling options. There's no incentive to take other services from Dish Network with Sling TV, but AT&T incentivizes DirecTV Now Subscribers to buy into its highest-tier data plan -- Unlimited Plus. Investors can expect Verizon to do something similar.
AT&T has a sizable traditional TV business with both U-Verse and DirecTV. The early adoption of AT&T's DirecTV Now doesn't seem to have had a major impact on its traditional TV subscribers; it lost 27,000 subs last quarter versus 26,000 a year ago. Time will tell if AT&T sees more cannibalization over time.
Meanwhile, Verizon's video customer base is relatively small and geographically limited. A nationwide streaming service could help it cut into competitors' markets more than its own FiOS TV service.
While the margins on these streaming linear TV packages are much smaller than traditional TV, the opportunity to bundle nationwide makes them much more valuable for AT&T and Verizon. For Dish, it leads to a deterioration of subscriber value over time, and the cost savings don't even come close to making up for it.
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