Please ensure Javascript is enabled for purposes of website accessibility

Dish's Sling TV Economics Don't Add Up

By Adam Levy - Apr 14, 2017 at 4:14PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Dish saves money on acquiring customers, but it still can't make as much profit per subscriber with Sling.

If it wasn't for Sling TV, Dish Network (DISH 1.32%) 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.

Actor Danny Trejo in an ad for Sling TV.

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 (T 0.94%) launched DirecTV Now late last year and has already attracted some 400,000 subscribers, according to one media executive. Verizon (VZ 0.88%) 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

DISH Network Corporation Stock Quote
DISH Network Corporation
DISH
$20.78 (1.32%) $0.27
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$49.53 (0.88%) $0.43
AT&T Inc. Stock Quote
AT&T Inc.
T
$20.40 (0.94%) $0.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/22/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.