Dish Networks glad to leave AT&T despite worst quarter ever

Although the economy hasn’t caused substantial video cord-cutting yet, not all pay television providers are benefiting from the industry’s relative resiliency. Dish Networks saw its biggest-ever drop in subscribers in the fourth quarter and is counting on AT&T’s discontinuance of its partnership to actually help it recover in 2009 – if it is not too late already.

Dish’s results come as one-time partner AT&T and largest competitor DirecTV both added satellite subscribers in the fourth quarter, with DirecTV having its best quarterly gross subscriber numbers in nearly four years. Dish, meanwhile, lost 102,000 subscribers in the quarter and saw its revenue growth slow to just 1%, down from 11% a year ago. At year’s end, the company counted 13.678 million customers in its subscriber base.

The fourth quarter was Dish’s last quarter with AT&T distributing its satellite TV service as part of its HomeZone package, discontinued in February. AT&T cut ties with Dish just after the satellite operator posted its first subscriber loss in the second quarter of 2008. Bernstein Research senior analyst Craig Moffett anticipates that the loss of AT&T will cost Dish another 100,000 subscribers each quarter. AT&T accounted for 19% of Dish’s business, according to Dish Chief Executive Officer Charlie Ergen, who said the operator is looking to form a new partnership with an operator that doesn’t blur the line between competitor and partner. Contractually, AT&T can’t target Dish customers in hopes of switching them to DirecTV or U-Verse, but Ergen said that when the telco was its partner, it was incentivized to encourage customers to opt for U-Verse where available. As a result, Dish saw its churn rate increase even with HomeZone.

“[The loss of AT&T] is negative in a sense but also a positive because we are able to go out and get subscribers where we are not dealing with both a competitor and a partner,” Ergen said on Dish’s quarterly earnings call today. “We are able to develop long-term those kind of partners that are on the same page as us.”

Dish’s dismal quarter is also a reflection of the relative strength of DirecTV, now the exclusive satellite partner for AT&T, Verizon and Qwest Communications. Dish captured only 38.7% of the satellite market, down from 44.5% year-over-year, and this was when the relationship with AT&T was still intact. Even if Dish finds a new partner, DirecTV will cut into its earnings even more as it rolls out its quadruple-play service bundle with AT&T in 22 states. Still, despite DirecTV’s strength, Dish’s results also indicate a sharp deterioration in the satellite category overall, Moffett said.

“During Q4, the satellite category added just 199,000 subscribers, down from 360,000 last year, a 45% year-over-year decline,” Moffett said in a research note. “Overall, the satellite industry added just 759,000 subscribers in 2008, down from 1.6 million in 2007 and more than 3.2 million as recently as 2004. The satellite industry subscriber growth rate is now just 2.2%.  A year ago it was 5.3%.”

Despite Ergen’s optimism on paving the way without AT&T, the loss of the partnership, increased competition and an economy that continues to struggle likely means that 2009 will only be worse for the satellite provider, Moffett said. “Without AT&T, gross additions will face continued downward pressure. And a worsening economy poses a stiff headwind to any hopes of churn improvement.”

Ergen admitted that operationally, the company made its product too complex, making it difficult for others to do business with them. In 2008, he didn’t feel Dish should be aggressively promoting its product in the marketplace in the same way its competitors had, because the company wasn’t handling its current customers very well. Instead, Dish spent 2008 building its management team and infrastructure to move forward. The satellite company will focus on strengthening its marketing strategy in 2009, which Ergen confessed has been inferior to its competitors’. Dish will also focus on management based on the notion that anything the company does in one segment of its business affects other parts of the business as well.

“2008 was kind of a year where our goal was to stop getting worse, and in 2009 we are now prepared to go forward by getting better,” Ergen said, likening Dish to Wal-Mart in that it should thrive in a recession due to its low-cost focus. “It’s much easier to manage a company when you are trying to get better versus stop getting worse.”