NEW YORK (TheStreet) --Dish Network  (DISH)  wants its low-cost Internet-based Sling TV to become popular -- just not too popular.

Sling, which is set to begin service this month, has a curious deal with its largest content providers: It must limit its total subscribers to as few as 5 million, according to Macquarie Capital analyst Amy Yong who attended the Consumer Electronics Show in Las Vegas this week. The service was also likely watered down from its original conception, Yong said in an interview. 

The cap isn't intended to be a hard number, simply a point at which Dish would probably stop promoting the service, Yong added. Dish wouldn't confirm or deny such a cap, and the media companies that will provide their networks to Sling TV were reluctant to discuss specific terms of their deals with Dish. 

Caps are not uncommon with smaller packages as larger media companies such as CBS fear cutting into the fees they receive from pay-TV providers such as Comcast (CMCSA) , Time Warner Cable (TWC) and Verizon (VZ) . The networks don't want to jeopardize the bulk of their profit for the sake of Internet-based services even as they recognize that's where younger viewers are increasingly going for video.

"A lot of these smaller packages have caps," said Tom Eagan, an analyst with the Telsey Advisory Group. "The networks would want these caps because they're assuming (and probably rightly so) that after the cap, the [subscriber] growth would cannibalize" the pay-TV base.

In November, Dish Chairman Charlie Ergen said he expected Dish would charge $30 a month for the service, as opposed to the $20-a-month basic plan the Englewood, Colorado-based pay-TV operator announced this week. Dish is also offering select add-on packages for an additional $5 per month. On Thursday, Dish officials declined to say why it shifted to a cheaper service or say what channels, if any, were scrapped as part of the decision to go with a lower price.

If Sling TV can attract 1-2 million subscribers within a year, that "could open the flood gates for other players" to enter the over-the-top arena with similar services, Yong added.

But some pay-TV operators may be "reluctant" to chase the same millennial demographic that Sling TV is targeting because of the "historically high-churn characteristics" of younger consumers, she said using an industry term for turnover. "If the services gain little traction, we think this will be further proof that even larger players like Dish may find it difficult to go skinny," Yong said, noting that there are only 12 channels in the basic Sling TV plan.

"It's limited probably because some content owners did not want to have [Sling TV] widely distributed," Yong said. "This is a $20 product, so it's not talking about a lot of money here. [The networks] are dipping their toe in the water because the world is moving in that direction, but you want to be careful" with the new over-the-top services.

Just three media companies are supplying Sling's basic 12 channels: ABC Family, Disney Channel, ESPN and ESPN2 are from Disney (DIS)  while Adult Swim, Cartoon Network, CNN, TBS and TNT are part of the Turner Broadcasting division of Time Warner (TWX)  and Food Network, HGTV and Travel Channel are owned by Scripps Networks Interactive (SNI) .

Of those three media companies, only Scripps was listed by Sony (SNE) as a content partner for Sony's highly-anticipated new Internet-based platform, PlayStation Vue. Compared to Sling, Sony's service will include many more channels but is expected to cost a lot more. Scripps is providing the same three channels to Sony's service while its Cooking Channel and DIY Network would be offered as add-ons to Sling's basic package.

PlayStation Vue is also expected to offer CBS (CBS)  as well as some channels from Discovery Communications (DISCA) channels, several Twenty-First Century Fox (FOX) -owned Fox Broadcasting channels, including FX, Fox Sports and the YES Network; various NBCUniversal channels owned by Comcast (CMCSA) , including NBC, Bravo, CNBC, Syfy and USA Network; and several Viacom (VIAB) channels, including Comedy Central, MTV and Nickelodeon.

The lack of regional sports channels such as YES was cited by industry analysts as a glaring weakness of the Sling TV offering.

Additionally, there's no guarantee that Turner's stations will be offered on Sling TV for very long. Turner, in a written statement, said that "as part of our short term extension with Dish, Turner agreed to allow our networks to be part of their OTT service on a trial basis during their beta launch, giving consumers another potential platform to access our popular content and brands." Turner didn't say why its stations aren't being offered on PlayStation Vue as of now.

For its part, Disney declined to say why it isn't a PlayStation Vue partner. CBS and NBCUniversal declined to comment on the two over-the-top services, while Discovery, Fox and Viacom didn't immediately respond to requests for comment.


TheStreet Ratings team rates DISH NETWORK CORP as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate DISH NETWORK CORP (DISH) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, solid stock price performance and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

You can view the full analysis from the report here: DISH Ratings Report

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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