DISH Network Corp (NASDAQ:DISH) has been making some headlines recently. The satellite TV provider submitted a bid to acquire Sprint Nextel Corporation (NYSE:S) back in April, and on Wednesday, it offered to purchase Clearwire Corporation (NASDAQ:CLWR).
Why is DISH Network Corp (NASDAQ:DISH) trying to acquire a major wireless provider? Could it have anything to do with cord cutting?
DISH Network’s recent moves
Japanese firm SoftBank made an offer to buy 70% of Sprint Nextel Corporation (NYSE:S) back in October for $7.30 per share. In April, DISH Network Corp (NASDAQ:DISH) made a rival bid, offering only $4.76 in cash, but about $2.24 in DISH stock.
Yet, it looks like SoftBank will win out. The company said it expected to close its merger with Sprint in July, and the deal received security clearance on Wednesday (DISH had been waging a campaign to nix the deal on the grounds of national security).
After SoftBank made its offer for Sprint Nextel Corporation (NYSE:S), the wireless network provider moved to take control of Clearwire Corporation (NASDAQ:CLWR). Owning Clearwire would allow Sprint to improve its US wireless network — a network that offers less 4G Internet access than its major rivals Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T).
It’s possible that DISH Network Corp (NASDAQ:DISH) is attempting to use Clearwire Corporation (NASDAQ:CLWR) as a pawn to take control of Sprint. That’s what JPMorgan analyst Philip Cusick believes (according to The Wall Street Journal), noting that DISH’s control of Clearwire would make Sprint less attractive to SoftBank. Others disagree, believing that DISH would be content to take Clearwire and walk away from Sprint.
Regardless of whatever games DISH Network Corp (NASDAQ:DISH) may or may not be attempting to play, one thing is clear: the company is definitely trying to break into the wireless business. But why?
The growing trend of cord cutting
Commentators have been talking about cord cutting as a growing trend for quite some time. To date, it has yet to happen to any meaningful extent, although there is some evidence that it’s beginning to take place.
As Internet alternatives to cable (like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) Prime) ramp up their content spending and roll out great, original shows, more users might be inclined to cut the cord and ditch their cable or satellite provider once and for all.
By breaking into wireless service, DISH Network Corp (NASDAQ:DISH) can prevent the eventual extinction of its business model. Other providers, like Comcast, are somewhat insulated from this trend, as they — generally speaking — control access to the Internet. (Comcast, through NBC, also owns a lot of content.)
But DISH lacks these advantages. Nearly the entire value of the company is based on its approximately 14 million paid-TV subscribers. If cord cutting drove a meaningful amount of DISH’s subscribers to cancel their service, the entire company would be in danger.
DISH is aware of this, listing it as its second risk factor on its most recent 10K:
Competition from digital media companies that provide or facilitate the delivery of video content via the Internet may reduce our gross new subscriber activations and may cause our subscribers to purchase fewer services from us or to cancel our services altogether, resulting in less revenue to us.
Acquiring Sprint could help DISH transition
If DISH is able to beat back SoftBank and acquire Sprint and/or Clearwire, it would make the company a better long-term investment. DISH already has some spectrum it acquired in 2008; it could combine this spectrum with Sprint’s network to build a nationwide, wireless Internet service.
As The Wall Street Journal has pointed out, some consumers are starting to cancel their home Internet service, and rely fully on their wireless provider. DISH could certainly capitalize on this trend.
DirecTV (NASDAQ:DTV)’s investment outlook
The other major satellite provider, DirecTV (NASDAQ:DTV), is largely in the same position as DISH — it relies on providing paid TV. If investors believe cord cutting is inevitable, DirecTV (NASDAQ:DTV) seems like a particularly poor investment.
Like DISH, DirecTV admits that cord cutting could threaten its business model. But unlike DirecTV, it doesn’t seem to be taking any actions to address it.
If you believe cord cutting is several decades away, then DirecTV might not be a bad investment — its price-to-earnings ratio of 13 is less than the broader market, it generates a fair amount of cash, and it engages in generous share repurchase programs. Moreover, its one of Warren Buffett’s largest holdings.
But, if cord cutting starts to emerge as a potent trend, DirecTV’s seemingly cheap stock could quickly become a value trap.
DISH’s bid for Sprint is a way to circumvent cord cutting
A lot of investors might doubt the inevitability of cord cutting — an overhyped threat, one that won’t materialize for several decades, if at all.
But DISH Network Corp (NASDAQ:DISH) doesn’t seem to be looking at it that way. If it’s able to acquire Sprint and/or Clearwire, it could combine those network assets with its own spectrum to offer a great wireless Internet service — one that could prevent it from falling victim to cord cutting.
If it can’t, then it — along with DirecTV — could one day find itself bleeding subscribers, having lost them to Internet-only alternatives.
The article DISH Network Knows Cord Cutting Is the Future originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends DirecTV. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
