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We downgrade our recommendation on DISH Network Corp. (DISH - Analyst Report) to Underperform following severe competitive threat in the U.S. pay-TV industry. The company reported mixed financial results in the second quarter of 2013. Currently, DISH Network has a Zacks Rank #4 (Sell).

Why the Downgrade?

In the second quarter of 2013, DISH Network’s average churn rate and subscribers’ acquisition costs increased substantially whereas EBITDA reduced significantly year over year. Average monthly subscriber churn rate was 1.67% compared with 1.60% in the prior-year quarter. Average subscriber acquisition cost was $882 compared with $800 in the year-ago quarter.

The company holds a significant size of precious wireless spectrums but is yet to take a final stand about the utilization of those assets. In Jun 2013, DISH Network suffered two setbacks with respect to its plan of entering the U.S. wireless market. First, the company decided not to pursue the acquisition of Sprint Corp. (S - Analyst Report). Later on, DISH Network withdrew its offer to acquire the remaining 49% stake in the wireless wholesaler, Clearwire. The deployment of a nationwide wireless network is a very expensive and time consuming affair.

In the reported quarter, DISH Network lost 78,000 pay-TV customers compared with 10,000 in the year-ago quarter. We believe satellite TV operators are gradually losing to telecom operators and cable TV operators in the U.S. Telecom giants AT&T Inc. (T - Analyst Report) and Verizon Communications Inc. (VZ - Analyst Report) jointly gained 373,000 subscribers in the same quarter offering their respective fiber-based TV services. Cable MSO Comcast was able to reduce the rate of net subscriber loss year over year.

DISH Network’s acquisition of the Blockbuster movie chain may not provide the previously-expected synergy. In the last quarter, the Blockbuster business incurred an operating loss of $5 million. DISH Network has decided to reduce the domestic Blockbuster stores count to 350 by the end of Oct 2013. 

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