Dish Network’s pay-TV pain signals trouble for its $25.5 billion bid for Sprint Nextel. Weak quarterly results announced on Thursday show why the company covets Sprint. But the poor earnings â€" net income dropped 40 percent â€" also show why Sprint shareholders should be skeptical of Dish’s offer.
The company’s pay-TV business is maturing quickly. It added a net 36,000 subscribers in the three months to March, compared with 104,000 a year ago. Dish is also finding it more costly to acquire subscribers.
Moreover, Dish is swimming against increasingly unfavorable tides. As broadband service proliferates, increasing numbers of consumers are choosing to watch video over the Internet using cheap or free services like Netflix and Hulu. Dish is somewhat insulated from this trend because many customers live in rural areas, where broadband can be costly, slow or unavailable. But Dish can’t escape rising content costs as new distributors bid up prices.
That’s why snapping up Sprint is so important. The wireless industry’s future looks pretty bright because demand for mobile devices should keep rising rapidly for some time. Owning Sprint would give Dish a way to survive and thrive amid technological change.
The trouble is, Dish’s earnings flop makes rival bidder SoftBank’s offer look even more appealing. Granted, the Japanese company is offering only $20 billion. But it would plow money into Sprint, unlike Dish, which would pile on more debt. Also, under SoftBank’s offer, Sprint’s investors would still own a pure-play telecommunications company, whereas Dish’s deal would leave them with a pay-TV business with uncertain long-term prospects.
On top of that, SoftBank announced this week that there’s at least $3 billion in savings to be had from combining the two mobile-phone businesses, $1 billion more than its previous estimates. Companies in takeover battles often make rash promises. But such synergies are certainly possible from meshing two big players together.
Dish may argue its poor quarterly results are merely a hiccup. But they seem in line with longer-term trends. If SoftBank uses the extra cost savings to increase its offer â€" despite earlier saying it would not budge - that’s likely to make its already preferable deal a winner.
Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
