It is axiomatic that strong businesses can increase revenues faster than costs. Satellite TV provider Dish Network can't. Yet its shares are up a third over the past year, and it trades at a premium to its larger, more profitable peer, DirectTV. What gives? Well, it has achieved what many structurally challenged businesses aim for: a move into another industry. Or, more accurately, Dish has – with a little foresight and luck – created the impression that it is about to be in another industry.
Pay TV in the U.S. is growing its subscriber base very slowly, if at all. Dish's subscriber count has been stuck at 14 million for several years. The company has also struggled to increase prices. So revenues have been flat while the costs of programming have increased steadily. The resulting margin degradation has become acute in the last year. Dish has tried to combat this with well-designed set-top boxes that store big chunks of programming for replay without commercials (the television studios are not fans).
The foresight came when the company bought, first, some traditional wireless spectrum in 2008 for $700-million (U.S.) and then two chunks of satellite spectrum from bankrupted networks in 2011, for $2.9-billion.
The good fortune came last month when U.S. regulators ruled that the satellite spectrum could be used for terrestrial broadband services. Suddenly, Dish has enough spectrum to make some noise in wireless, with the right partner.
JPMorgan has estimated that, given the authorities' blessings, the spectrum holdings could be worth $5-billion (Dish's total enterprise value is about $20-billion). But the hyper-competitive U.S. wireless industry, while it contains pockets of high profitability, will crush a half-baked new entrant. Investors paying up for Dish should keep another axiom in mind: Business transitions never go quite as planned.