There's no doubt that Sling TV -- the new over-the-top service from DISH Network (NASDAQ:DISH) -- presents an attractive offer to potential cord cutters. Dish has pieced together several of the most valuable cable networks and offers them at a relatively low price, $20 a month. The OTT service provides a hedge against more customers leaving traditional pay-TV.
But in order for Dish to make any real money off of Sling TV, it needs to provide the broadband connection that the service is delivered over. Let's take a look at why that's the case, and how Dish could accomplish that task.
The problems with Sling TV's business model
As mentioned, Sling TV is a hedge against more people cutting the cord. Dish has started losing more subscribers due to fierce competition in the pay-TV industry, customers with poor credit, and probably a few cord cutters, as well. In the second quarter, the company posted a net loss of 44 million customers, and it lost 12 million more in the third quarter.
While Sling TV might offer an attractive option for those customers that are already leaving Dish, it's also attractive to its current 14 million customers paying an average of $84 per month. In fact, when DirecTV (NASDAQ:DTV) was asked about offering a package similar to Sling TV on its fourth-quarter conference call, CEO Mike White said, "Our primary concern is how it impacts trade-down and cannibalization of the core business." He added, "The margins are pretty thin on that package."
There are reasons to cannibalize business sometimes, but Sling TV is less than ideal. It's simply a hedge, and still appeals to only a small audience. Still, being able to bundle broadband service with Sling TV would dramatically improve the service's ARPU.
Using spectrum to connect the home
During the last few years, Dish has amassed an impressive portfolio of spectrum licenses. In the recent AWS-3 auction, Dish successfully acquired even more licenses while strategically increasing the value of its existing portfolio. Dish may continue to sit on those licenses and let them appreciate further, but I think it's going to use them in some way to offer broadband Internet service.
That's not to say that Dish is going to build a wireless network of its own. The capital expenses for that are high, and it's simply overkill for offering data service in the home. Instead, it could make a deal to share network capacity with one of the four national carriers.
Verizon would work well as a partner, considering that Dish's spectrum holdings are particularly strong where Verizon's are weak. T-Mobile (NASDAQ:TMUS) is another strong option, considering its network already supports the same type of spectrum in Dish's portfolio and it has more excess network capacity. Dish may even elect to sell some of its network capacity to Verizon to fund a venture with T-Mobile, because it takes advantage of both situations.
A network-sharing deal with Dish would be great for whichever carrier it partners with. Dish doesn't present a threat to the carriers for wireless service, and it potentially opens up a nationwide band of spectrum to the carrier. Dish, meanwhile, gets someone to build the infrastructure for it.
There's also been speculation that Dish will simply acquire T-Mobile. On T-Mobile's fourth-quarter earnings call, CEO John Legere said, "I see no version of what DISH is doing as not being a positive for us." In other words, he thinks an acquisition or network-sharing agreement would benefit shareholders.
Bundling for the win
DirecTV said it's not really interested in offering a product similar to Sling TV at this time, but that could change after it merges with AT&T and gets the benefits of bundling high-speed Internet or wireless service.
DISH Network needs to figure out a way to do something similar. Partnering with T-Mobile would be a good option and could help strengthen the company's hedge against cord cutters. Otherwise, investors will see the value of the company's operations shrink. Of course, its spectrum holdings will continue to increase in value.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. 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.