Dish Stock Still Has Big Upside But Not As Much If Promotional Pricing Persists

Watch those prices

Dish Network’s average subscription price for its high-definition TV service has declined in recent years from our estimate of $20 a month in 2006 to about $10 in 2009 amid increasing competition from DirecTV, AT&T and Verizon, which also offer HDTV services.

Dish Network, DirectTV and Verizon are extending promotional plans in the hopes of attracting new customers while Time Warner Cable does not charge extra for HD channels. This combined with ongoing disputes with content owners that provide HD programming are creating a challenging pricing environment.

We expect average subscription prices to stay around current levels in the near term; however, if promotional activities continue longer than expected or new content agreements adversely impact Dish, this could lower our price estimate of $25.84, which is currently 30% higher than the current market price.

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Promotional Extension Hurts Pricing

Dish Network’s recent marketing campaign offers to waive the $10 per month add-on fee for HD programming if customers commit to a two-year contract. Initially this offer was intended to last until the end of September 2010; however, the company recently extended this offer until January 2011.

We interpret this as a sign of poor pricing power as Dish is willing to sacrifice HD revenues in an effort to attract new customers. While we do not know how successful this strategy might be, the willingness to offer free programming hurts pricing for HD services overall. If Dish extends promotions even further, this will lead us to lower our estimates for average HD pricing.

Dispute with Content Owners

Dish has been in disputes with content owners like Disney and Fox over increases in HD programming costs and recently faced a complete blackout from Fox due to an impasse. The company argues that if it agrees to higher content prices, it would need to pass these costs on to its customers hurting its business and image as a low cost service provider.

While an agreement was finally reached with Fox, service interruptions frustrate customers and hurt brand value pointing to further pricing issues for the company. In these circumstances, Dish becomes more reliant on offering promotions to attract new customers or retain current ones, further eroding the perceived pricing premium associated with HD services.

Since competitors like DirecTV also offer free HD programming for new customers and Time Warner Cable is not charging for HD channels, Dish is forced to compete on price, which makes it more likely that further price cuts will come.

Lower Pricing on the Horizon

We currently forecast that average HD subscription prices will decline slightly and stabilize around $9.50. However as issues mount for HD providers, we believe that pricing might decline further. If average prices gradually reach $5.00 by the end of our forecast period, this subtracts 4% from our price estimate.

You can modify our forecast above to see how Dish Network’s price estimate is impacted by change in average HD subscription fee.

You can see the complete $25.84 Trefis price estimate for Dish Network’s stock here.

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