March
Madness
at EchoStar
by Ken
Freed.
.
Littleton-based
Dish Network in March faced disputes with Gemstar-TV
Guide, Viacom and the SEC.
EchoStar
Communications in early March made headlines from three
disputes. First, the Colorado-based operator of the Dish
Network direct broadcast satellite (DBS) service settled
a patent rights fight with Gemstar-TV Guide. Second,
EchoStar removed Viacom programming from the satellite
before resolving a carriage fee dispute. Third, EchoStar
announced a delayed annual report tied to a restatement
of earnings due to accounting errors.
The month opened
with the March 2 announcement that EchoStar had settled a
legal dispute with Gemstar-TV Guide. EchoStar in late
2000 had sued the NewsCorp division for antitrust
violations centered around the interactive programming
guide (IPG) for the set-top boxes built by EchoStar for
the Dish Network and other customers. Gemstar countersued
for patent rights infringement.
After protracted
negotiations and court appeals, EchoStar agreed to a
one-time payment of $190 million in cash for use of
Gemstar-TV Guide's intellectual property and technology,
promising TV Guide branding of any EchoStar interactive
program guide (IPG).
Further, EchoStar
inked a distribution deal for the launch and carriage of
the TV Guide Channel along with extending an existing
distribution agreement for carriage of the TVG Network.
The Gemstar patent
settlement and the TV Guide distribution deal are both
contingent on sale of the C-band businesses, a deal
that's subject to federal regulatory
approvals.
EchoStar declined
interview requests about the details of the deal. TV
Guide Television Group president Ian Aaron did agree to
an interview, but when pressed for details, he replied,
"I'm not at liberty to say."
Aaron did say that
under the deal EchoStar could continue to work with
OpenTV to develop an interactive program guide using
patents in the Gemstar portfolio. However, EchoStar and
OpenTV are prohibited from sell that guide to any third
parties that lack a license from Gemstar.
Along with settling
its patent infringement lawsuits with EchoStar,
Gemstar-TV Guide a week earlier announced resolution of
similar licensing disputes with Pioneer. A settlement
with Thomson and TiVo was announced last summer. The only
outstanding litigation is with Scientific
Atlanta.
"Lawsuits like
these are fairly routine in the media business," said
Sean Badding, president and senior analyst for The Carmel
Group in California, a consulting firm focused on the
satellite industry. "This settlement with Gemstar was
almost inevitable, and it better extends the relationship
between the two companies."
VIACOM
DISPUTE
Less than a week
after settling the Gemstar dispute, EchoStar's simmering
fight with Viacom over programming fees boiled over into
open combat.
When a temporary
restraining order expired at midnight on March 9, because
Dish Network no longer had written consent to carry
Viacom programming, EchoStar took down from its
satellites all 16 of Viacom's owned-and-operated CBS
local stations and 10 national Viacom channels, including
ESPN, MTV and Nickelodeon.
Two days of bitter
rhetoric on both sides ensued.
EchoStar chairman
and CEO Charlie Ergen accused Viacom of extortion and
bullying tactics. In a "Charlie Chat" carried live on the
Dish channel normally used for CBS, Ergen claimed Viacom
was insisting on a 40 percent rate hike in CBS
retransmission fees while bundling the network with less
desirable Viacom channels.
Ergen invited Dish
Network subscribers to keep their own rates down by
calling the media conglomerate and complain. EchoStar
even posted the home phone number of Mel Karmazin,
president and COO of Viacom.
Viacom countered
through press briefings by CBS Executive VP Marty Franks
and MTV president and COO Mark Rosenthal, who essentially
accused Ergen of lying about the fee hike. They claimed
the increase actually was only six cents per subscriber
over the life of the contract.
Viacom also started
by running newspaper ads and onscreen crawls on Viacom
cable channels and CBS broadcast stations inviting Dish
subscribers to call DirecTV or their local cable operator
to get the programming they want.
ATTACK ADS
All through this
period, however, negotiations continued. A settlement
finally was reached on the evening of March 10, the exact
terms still undisclosed. Viacom's programming was
restored on Dish Network by the next morning.
"The good news is
that EchoStar locked in a sweeter deal with Viacom than
would have been possible without the blackout for two
days," said Badding. "Programming carriage deals usually
last three to seven years, so EchoStar has no more
worries about renegotiations with Viacom until at least
2007."
EchoStar achieved
this without seriously compromising its market share
position, he continued. There likely was some churn, but
the dispute was settled quickly enough not to be
significant. "The real damage may have been
psychological, because the last thing you ever want to do
is create among your customers any negative feelings
about your quality of service. You do not want to do
anything that creates an opening for your
competition."
As for the negative
tone of the rhetoric during the dispute, he said, "That
was just negotiation process posturing. If the dispute
got a little personal, that's part of the game, and both
sides knew it."
Blum mirrored this
view. "I think that's pretty much to be expected. That's
the way these things work. Either you are going to
negotiate at the very beginning of a contract, or you are
not. If you reach an impasse, you have to let something
happen in order to break the impasse, and that's what
EchoStar and Viacom did. EchoStar tend to be more
aggressive in these negotiations than DirecTV, but that
said, everybody, all program distributors &endash; cable
and DTH alike &endash; are taking a more aggressive line
in these content negotiations lately."
Said Badding,
"Programming represents a third of the total costs of
distribution for satellite or cable operators. If content
distributors cannot contain those rising costs, they are
creating a deeper and deeper hole for themselves to dig
out of. Because the programming model that's emerged in
the past couple of decades needs to be amended, Charlie
Ergen did all program distributors a favor by standing up
for his subscribers and keeping down his programming
costs. His action ultimately helps to create market value
for his subscribers, his shareholders and the programmers
themselves."
SEC
DISPUTE
Later on the same
day that Dish Network restored Viacom programming, March
11, EchoStar announced that it may delay filing its
annual report because the Securities and Exchange
Commission (SEC) had raised accounting questions that
might require a restatement of the company's 2001
results.
The SEC earlier had
been informed that EchoStar had over-accrued $17 million
in 2001 and $9 million and 2002 for the replacement of
obsolete smart cards in its set-top boxes. The accounting
correction meant higher earnings for both years on a
dollar-for-dollar basis, thus the restatement. An SEC
probe into EchoStar accounting practice might
follow.
"This seems to be a
technical accounting dispute among the bean counters,"
said Stephen Blum, president of Tellus Venture
Associates, a California-based market research and
analysis firm specializing in the satellite industry.
"Rather than a question of new information being
discovered, this information had already been disclosed.
It's really an issue of which box do you put the beans
in."
He added that the
restatement is important only because of the numbers
involved. "Anytime you have something that start with six
zeroes behind it , you have to pay some attention to it.
But I don't think that in the long run or even in the
short run it's going to make a lot of difference to
anything."
The delay in
restating the earnings is not significant in today's
climate of accounting scrutiny, Blum said. "This is
something they have to resolve, But I don't see any other
kind of motive behind it. I'm always ready to be
surprised in this business, of course, but I'd be
extremely surprised if EchoStar were playing games with
something like this. It's really not something they
do."
"This SEC inquiry
does not say that EchoStar did anything wrong," agreed
Badding. "The SEC tends to look at balance sheets more
closely than ever before, so EchoStar is just making sure
it's in line with all SEC requirements."
The shareholder
response seems to be quite positive, he noted, calling
that another sign the restatement is not serious. "It
would really surprise me if this is any more than just a
matter of protocol."
DIRECTV
MERGER
The pending merger
of DirecTV with News Corp. and the potential merger of
Disney and Comcast had little to do with EchoStar's
latest moves, said Badding. At most, he suggested,
EchoStar is looking at things from a capital perspective,
deciding how best to compete with such large
entities.
"Becoming more
cost-effective with content providers has to be weighing
heavier than ever before in Charlie's mind right now.
With content providers joining forces with content
distributors, because he's only a content distributor, he
has to make decisions that keep him ahead of the
curve."
EchoStar has relied
on being a technology innovator for its competitive
advantage, he said. For the company to continue down that
path, it make sense to work with advanced interactive
content providers like TV Guide to keep its competition
at bay by leveraging it product innovations.
BUNDLING
Although EchoStar
did not end content bundling with its defiance of Viacom,
Badding believe the Viacom dispute will have long-term
effects on digital "must carry" rules and the ensuing
retransmission deals between DBS operators and
broadcasters.
"If anything," he
said "this dispute has made distributors think twice
about how to proceed with their content providers. I
think bundling will fade long term in favor of ala
carte programming for both distributors and
consumers, who want more personalized services, who want
to have more control over their digital
content."
The first step over
the next five years, he predicted, will be a change in
the advertising model for revenue streams in response to
ad zapping with personal video recorders, just as the
music industry is adjusting to peer networking. A change
in the programming model toward ala carte content
will follow within ten years as on-demand technologies
become the primary market driver. 
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