Cord-cutters and cord-nevers are starting to have a significant impact on pay-TV providers. Nine of the top 10 pay-TV providers lost subscribers in the second quarter, including Dish Network (NASDAQ:DISH), which now serves just 13.9 million subscribers. It posted a loss of 81,000 subscribers during the quarter.
What's interesting about Dish Network compared to other pay-TV providers is that its subscriber count includes a service targeted toward cord-cutters and cord-nevers: Sling TV. The service launched at the beginning of the year includes two dozen live networks (including ESPN) streamed over the Internet for $20 per month. Dish is including those subscribers, which tallied 169,000 at the end of the first quarter, with its satellite subscribers, who pay an average of over $87 per month for service.
Not all video subscribers are created equal... or are they?
CEO Charlie Ergen explained the reasoning behind lumping Dish's $20 per month Sling TV customers with its high-end satellite subscribers. In the end, he says, they provide about the same value.
"You don't really care where you get a video customer," he said during the company's second-quarter earnings call. "We're paying the programmer the same. When we get a Sling customer or we get a DISH customer and they both have ESPN, we just write the check to ESPN, add the two together and write a check to ESPN."
And while programming costs are the same, the cost of acquiring a customer are significantly lower with Sling TV. When someone signs up for Dish's satellite service, the company has to send out a technician to install everything. Ergen estimates the cost of acquiring a new satellite subscriber at around $800.
Comparatively, the cost of acquiring a Sling TV customer is the cost of a one-month free trial divided by the conversion rate (plus a bit more now that it's running a national television campaign). Nobody has to install anything. As a result, Sling TV customers start to turn a profit more quickly for Dish Network, especially considering it offers satellite service for $19.99 per month for the first year.
With churn rates continuing to climb -- up 5 basis points from last year to 1.71% -- Dish isn't keeping subscribers around as long as it used to. Producing faster return on investment could help improve profitability.
However, as more subscribers shift to over-the-top services, average revenue per user will eventually come down. Dish was able to increase its ARPU to $87.91 despite the inclusion of Sling TV customers. That's up from $84.15 the year before. It can't keep that up as customers continue to shift to less expensive services.
Dish isn't the only one playing this game
Comcast (NASDAQ:CMCSA) recently started testing a streaming service of its own, called Stream, in select markets. The new service includes the broadcast networks and HBO for $15 a month. The only catch is that subscribers must also subscribe to Comcast's broadband service.
Still, Comcast is providing tremendous value to subscribers by offering HBO and more for the same price as HBO's new stand-alone service. Similarly, Sling TV offers excellent value considering some analysts have pegged a stand-alone ESPN service at a price well above the $20 per month Sling TV subscription price. But unlike Comcast, Sling TV doesn't have any services -- like broadband Internet -- to subsidize the low cost of a subscription.
At the same time, Ergen sees the number of options available to customers continuing to expand. Whether it's more stand-alone OTT services or services offered by competing pay-TV providers, the Dish CEO sees competition continuing to grow. "10 years ago, he had three options," he told analysts. "Today he's got four or five or six options, and he's going to have 50 or 60 options in the future probably."
Sling TV is the company's best hedge against the growing competition, but it's not enough to hedge the losses of its old satellite business.
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.