Dish Network reports losing subscribers, blames transition period

For a company that's earning 50% more as a spun-off entity than it did as a wholly-owned division of EchoStar, what could possibly go wrong? Yesterday, Dish Network actually listed 28 possible dire consequences in a filing with the SEC.

For the past year, digital satellite service provider Dish Network has reported gaining subscribers by the truckload, signing up approximately 170,000 net new customers in just the fiscal second quarter of 2007 alone. But that gain was pared down to 110,000 in the third quarter of last year, followed by 85,000 in the following quarter, then 35,000.

Yesterday, the newly independent service provider reported having shed 25,000 subscribers in its fiscal Q2 2008, bringing its total customer base to 13.79 million.

In a filing with the US Securities and Exchange Commission yesterday, Dish cited multiple factors contributing to the company's uncertainty about its outlook, including its recently completed spinoff from parent EchoStar Communications, and its ongoing transition to a full high-definition service. Dish still relies on EchoStar not only for its set-top boxes (EchoStar is Dish's sole provider,) but for its communications licenses, without which the company may not be able to offer Internet service.

"Equipment, transponder leasing and digital broadcast operation costs may increase beyond our current expectations," the company writes in its latest 10-Q filing.

"We may be unable to renew agreements for these services on acceptable terms or at all. EchoStar's inability to develop and produce, or our inability to obtain, equipment with the latest technology, or our inability to obtain transponder capacity and digital broadcast operations and other services from third parties, could affect our subscriber acquisition and churn and cause related revenue to decline."

As far as this last quarter is concerned, Dish's financial performance was actually pretty good. The company reaped just over $2.9 billion in revenue, up 5.6% over the previous year's second quarter; and most impressively, operating income rose by almost 50% to about $335.9 million. (This is when you figure Dish Network's division separately from EchoStar for the prior year.) So the dire consequences aren't being realized just yet.

But they could be, and Dish was up-front about that in its 10-Q. First of all, AT&T's distribution agreement with Dish for television service for some of the telco's triple- and quadruple-play customers, is set to expire at the end of this year; and with AT&T expanding its U-verse service on its own, Dish doesn't expect AT&T to continue that agreement past December.

"Our ability to maintain or grow our subscriber base will be adversely affected if we do not enter into a new agreement with AT&T and we are not able to develop comparable alternative distribution channels," Dish Network writes.

Last March, EchoStar won several 700 MHz licenses in the E-block, where UHF Channel 56 resides now, having bid nearly three quarters of a billion dollars. In an indication that Dish Network's spinoff from EchoStar isn't exactly a separation, the company said it will be somewhat responsible for commercializing those licenses in order to build services in that spectrum. Those services may be especially necessary if Dish finds itself competing directly against AT&T in regions where the two are currently partners.

But finally, on top of all that, the company characterized itself as being in the fight of its life, along with parent EchoStar, against TiVo in a long-standing patent infringement battle regarding DVR functionality in EchoStar's set-top boxes -- the only STBs that Dish uses. That battle heated up even more last month when EchoStar launched its own wave against TiVo, claiming TiVo's software violates EchoStar's established patents.

"If we and EchoStar are unsuccessful in our appeal to the United States Supreme Court in the TiVo case, or in defending against TiVo's motion for contempt or any subsequent claims that EchoStar's alternative technology infringes TiVo's patent, we could be prohibited from distributing DVRs supplied to us by EchoStar, or be required to modify or eliminate certain user-friendly DVR features that we currently offer to consumers," states Dish Network's 10-Q.

"In that event we would be at a significant disadvantage to our competitors who could offer this functionality and, while we would attempt to provide that functionality using different technology and/or manufacturers other than EchoStar, the adverse affect on our business could be material. We could also have to pay substantial additional damages."

These were just some of a 28-point list of possible uncertainties -- which also included the lackluster US economy -- facing Dish Network's future as it begins the second half of its fiscal year. But that 50% gain in quarterly net profit helped offset the company's dire predictions, with Dish Network stock value trading up 2% on the NASDAQ exchange by late morning Tuesday.

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