Just One Dish in a Crowded Buffet

It hurts to lose a friend. EchoStar Communications (NASDAQ:DISH), better known as the parent company of satellite-TV provider Dish Network, is learning that the hard way. For years, most of the new Dish subscriptions came from a cross-promotion affiliation with AT&T (NYSE:T). Now that AT&T is less committed to the relationship, the pace of new satellite TV sign-ups is dropping.

With a good buddy at its side, EchoStar watched its subscriber base increase by about 15% a year from 2002 to 2004. But when AT&T decided to focus on developing its own TV delivery system over fiber-optic cable, EchoStar's subscriber growth dropped to 10.4% for 2005. The trend continues, with EchoStar's latest earnings report showing just a 9.2% uptick over the same quarter last year to a total of 12,265,000 subscribers.

In all fairness, though, getting the cold shoulder from AT&T isn't the only thing hurting EchoStar's net growth these days. The television market is fiercely competitive, and it's becoming harder and harder to earn a share of consumer attention. EchoStar has to deal with cable companies like Comcast and Time Warner Cable, the new wave of phone companies like AT&T and Verizon looking to enter the market (and America's living rooms) through what used to be a simple phone line, and massive DVD sales from the likes of Amazon.com (NASDAQ:AMZN) and Wal-Mart.

Wait, there's more. Netflix (NASDAQ:NFLX) is growing its DVD-by-mail rental audience at a furious pace, with an existing subscriber base of nearly 5 million already. And traditional TV producers like CBS and Disney's ABC are exploring different ways to get their content to viewers over the Internet, either through their own websites or with partners like Apple's (NASDAQ:AAPL) iTunes Music Store.

Finally, there's EchoStar's arch-nemesis: DirecTV (NYSE:DTV), the only other option for satellite-TV service. DirecTV is facing the same challenges as EchoStar, but it hasn't had any massive subscriber-recruiting partnerships to fall back on. Instead, DirecTV keeps spending money to make money. If you think there's a lot of DirecTV advertising in your mailbox and on TV, you're absolutely right. Where EchoStar spent 15.6% of its revenue this quarter on subscriber acquisition and retention programs, DirecTV opened the marketing checkbook to the tune of 26% of revenues.

Both satellite companies are experiencing monthly churn rates of around 1.5%, meaning that about 20% of their subscribers at the start of the year will no longer be customers by the end of it. Overcoming customer churn is one of the reasons why subscription services like Dish Network need to keep acquiring new customers just to maintain market share, let alone grow it.

All of this added up to revenues of $2.29 billion for the quarter, up 13% over last year and in line with what the analysts were expecting. Earnings of $0.33, however, fell far short of the targeted $0.43 per diluted share. If you back out a $74 million charge for the TiVo (NASDAQ:TIVO) lawsuit judgment that may or may not be upheld in the next round of appeals, you can add a bit more per share to the results, so it's really up to the court system whether EchoStar came close to expectations this quarter. Any way you slice it, the bottom line was much thinner than the $0.69 per share in last year's comparable quarter.

Rumblings about a merger between DirecTV and EchoStar are making the rounds again, but antitrust regulations make such a pairing unlikely. The satellite-TV providers are doing what they can to stay in the game, rolling out better receiver boxes and launching more satellites, all with an eye to increasing the amount of content they can serve up to you and me.

They are also dabbling in video on demand, but cable companies have a slight edge there, for boring, technical reasons. But the subscriber count keeps increasing, and satellite dishes are popping up on rooftops everywhere like wild mushrooms.

To me, EchoStar isn't screaming "buy me!" at this point, but if the company can find a way to reverse the dropping subscriber growth, there could be good times still to come. I'm waiting until I can see some proof of renewed growth, though.

Related links:

• TiVo and EchoStar are duking it out in court.
• Video on demand is coming.

Netflix, Amazon.com, TiVo, Time Warner, and Disney are Motley Fool Stock Advisor selections, and Wal-Mart is a Motley Fool Inside Value pick. Try out any of our newsletter services free for 30 days.

Fool contributor Anders Bylund has an inactive dish on the corner of his house and subscribes to digital cable. It's a long story. He owns stock in Netflix and Disney. There's no disclosure like Foolish disclosure.