DISH Network Wipes Out Commercials


Finally! The device generations of TV watchers have fantasized about owning is now available; it's a wonder it took so long to hit the market. Satellite broadcaster DISH Network (NAS: DISH) has introduced a new DVR with a feature that can almost completely eliminate commercials for recorded TV. Reaction from the big broadcasters has been muted so far, save for the occasional irate outburst. Will this lethal, new, commercial-killer eliminate their most lucrative source of revenue?

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A DVR that skips commercials isn't exactly a new invention. Many recorders in use today give users the ability to fast-forward rapidly over ads. The difference between these devices and DISH Network's new offering is that the latter's "auto hop" feature cuts them out entirely, save for a brief flash of black screen.

There's little doubt that auto hop will be popular. Who really wants to deal with ads, even of the fast-forwarded variety? What'll help is the company's edge-of-affordable price point for this service, which is to be $10 extra per month for its subscribers after a one-time $99 fee.

The firm is undoubtedly hoping the commercial-killer will be a potent weapon luring customers away from its much larger rival, satellite's big daddy, DirecTV (NAS: DTV) . There are a lot of subscribers to poach -- DirecTV had 28.5 million of them at the end of its first quarter, 20 million of which were in the U.S. By contrast, DISH Network had approximately 14.1 million total subscribers.

DirecTV has also been better at adding to those customer rolls. This past quarter, it enjoyed a net gain of around 674,000 subscribers, which was over half-a-million more than DISH Network's additions of approximately 104,000. On a positive note, the majority of the DirectTV's growth is occurring in Latin America, and net U.S. subscriber additions of 81,000 actually trailed DISH Network's for the quarter.

DISH Network also needs to lift its revenue per subscriber, which hasn't been as high as hoped. Its first-quarter revenue per share was $76.71, and although it was $1.32 more than in the same period the previous year, it fell about $0.60 short of analyst expectations. Not to mention that it was significantly lower than DirecTV's figure of $91.99.

Having said that, DISH Network's actually improved its financial results of late. Although its most recent quarterly net profit figure was down, this was due to a $341 million legal settlement in the same period the previous year. Stripping away that one-time payout resulted in earnings per share of $0.75. That meant first-quarter EPS of $0.80, a full dime above analyst expectations, actually grew about 7% on an apples-to-apples basis. Revenue, meanwhile, grew 11% year on year to $3.6 billion. An extra $4 a month for the commercial zap feature, along with a bunch of $99 fees, should put some more zip in all of those numbers.

Executive insult
What's of more concern is advertisers, the glue that holds the network TV providers together. Network executives are understandably spooked about anything that might make any advertiser even the slightest bit unhappy. That's why the only apparent early reaction by the networks to DISH's news was negative -- the broadcast chairman of Comcast's (NAS: CMCSA) NBC, Ted Harbert, characterized auto hop as "an insult to our joint programming, and I'm against it."

But should he be? Despite the popularity of DVRs since their introduction in the late 1990s, advertisers haven't given up and pulled their spots from TV. In fact, ad spending in the medium continues to grow; in 2011 year on year growth came in at 2.4%, to around $68 billion.

Now, those increases weren't spread evenly around the business. Much of the 2011 rise was due to syndicated programs and cable channels (which grew at a 15.4% and 7.8% annual clip, respectively, compared to only 0.1% for network TV). News Corp (NAS: NWS) for example, saw operating profit in its cable division grow a mighty 20% in its most recent quarter.

You can't cut this
Cable is where the hot shows are these days, so it's no surprise that's where the ad money's going. Luckily, cable has nothing to fear from the new DVR feature NBC's Harbert is so annoyed with -- auto hop only works with network TV shows, and pre-recorded content at that. So the best-growing segment in all of television is safe from this dreaded device as is the one with the priciest ad spots -- big-time sports programming like the World Series and the Super Bowl.

Besides, if nothing's stopped advertisers from putting their spots on TV by now, nothing will. It's still far and away the best medium for getting a message across to a mass audience. The Internet, for one, is simply too wide and scattered to provide that level of viewership in one shot. DISH Network's cool new feature isn't going to drive advertisers away any more than other perceived threats to TV's power as an ad medium. Instead, look for the new DVR to be a popular choice for DISH Network's subscribers and a nice, albeit modest, contributor to the firm's top and bottom line.

DISH has done well leveraging its technology, and we've identified three more American companies that should thrive over the next few years by doing the same. Find out which firms these are in our FREE report, "3 Stocks To Own For The New Industrial Revolution."

At the time thisarticle was published Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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