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EchoStar, Viacom Go for the Jugular

By Alyce Lomax
March 9, 2004

That old tag line "I want my MTV" may be the battle call for customers caught in the middle of a roiling showdown between satellite television provider EchoStar Communications (Nasdaq: DISH) and network owner Viacom (NYSE: VIA). Echostar yanked off the air all Viacom stations after the two companies couldn't agree on payment hikes, and neither company looks ready to back down.

Channels that EchoStar customers won't get include such well-known TV real estate as BET, Comedy Central, MTV, Nickelodeon, and VH-1, as well as the top-rated CBS network. The markets involved are major ones, including New York, Boston, Dallas-Fort Worth, Los Angeles, and San Francisco; the move affects 1.6 million EchoStar customers who receive CBS local programming, and all 9.5 million customers who receive the national stations.

EchoStar's public statement today contained fightin' words, accusing Viacom of "holding the public airwaves hostage" by asking for 40% rate increases for its channels; it urged its customers to call Viacom and protest. It's offering a reimbursement of $1 for CBS, and $1 for the rest of the national Viacom stations, for impacted customers -- hardly the kind of discount anyone would really feel at all on their monthly statement. (Heck, it's possible many of us are already pretty disgusted with what we're paying regardless -- Rex Moore recently pointed out rate hikes across the industry.)

Viacom, on the other hand, dismisses EchoStar's move to shut down its channels with an "easy" fix for customers. The network provider is suggesting to customers just make the switch to other means of receiving its channels, which include cable providers Comcast (Nasdaq: CMCSA) or Cox Communications (NYSE: COX), satellite archrival DirecTV, owned by Hughes Electronics (NYSE: HS). (Coincidentally, Fool contributor W.D. Crotty wrote about satellite wars yesterday in regard to satellite provider Pegasus Communications (NYSE: PGTV), but who knew this gang was so ready to rumble?)

At last check, EchoStar shares were up about 2%, though they've been sagging over recent weeks as this issue -- and the deadline for negotiations -- loomed. The idea that EchoStar's customers will miss out on major channels that are pretty much ubiquitous on rival cable and satellite providers' basic packages is risky. Regardless of which company's wearing the black hat, I have a funny feeling EchoStar customers aren't feeling too sorry for either party right about now.

Do you want your MTV? Is it "lights off" at Nick at Night? Whether this impacts you or not, what do you think: Did EchoStar make the right move, or are its customers just going to be seriously put out? Talk about the issues at hand on the EchoStar Communications discussion board.

Alyce Lomax does not own shares of any of the companies mentioned. On Sunday night, a ticker about this very issue, running along the bottom of the TV screen on Comedy Central, made her wonder if it wasn't only a test of the emergency broadcast system.
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Echostar yanked off the air all Viacom stations after the two companies couldn't agree on payment hikes, and neither company looks ready to back down.

It's kind of funny. Viacom has a promo running on the comedy channel, touting all the shows you won't see on Dish. Each one comes up on screen (Reno 911, The Daily Show, The Man Show, Chappelle, etc.) , then they "scribble" out the main character, using the line "make room on your couch for your friends with Dish" and finish the spot with "Comedy Central, now exclusively on cable and DirecTV."

Of course the only people who can see the promo are those on cable and DirecTV anyway. So while it's a "shot", it only speaks to people who are not affected. It's pretty useless for getting the people who care riled up, and the ones who can see the spot are going "Huh?"

Meanwhile, on Dish, the channel for Comedy Channel has a slide up (with bright music playing behind it) saying something to the effect "We are unable to bring you Comedy Channel due to a contract dispute with Viacom. Please tune to channel 101 for details." On Channel 101, Charlie Ergen (CEO) is talking about how they know you want your channels uninterrupted, but that Viacom is demanding "unreasonable price increases" (slide goes up in 100 point type "UNREASONABLE PRICE INCREASES"), he says "as much as 40%, far higher than inflation" and then says Viacom is also trying to force them to pay for channels which don't really add value.

The spiel runs about 2 minutes, and repeats, repeats, repeats, repeats.

So now it's a test of who costs who more: CBS loses about 9 million homes for all of its channels (that's about 8% of the country, I think) which means their ratings will go down temporarily. And they will lose whatever payment Dish makes for the current use of all of its channels. Dish, on the other hand, risks losing subscribers to DirecTV or cable if the dispute goes on for a long time.

It'll be an interesting slugfest. Personally, I'd like to see more of this. I'd love to see the Cox - Disney fight (over the escalating ESPN fees) break out the same way, and let them move ESPN to a separate tier, allowing people to pay for it - or not - depending on whether they actually watch it or not.
 

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GH,

It is a very interesting situation. Dish is the weakest media company. They have no real leaverage over the industry. For instance when News corp's Direct TV goes to bid on content they can use Fox as leaverage against other players wishes for a price hike. Dish is out in the cold.

If Via gets a rate hike then all the others will want one. Dish was known as the cheaper competitor...that is about to end abruptly. Dish is sold at Radio Shack while DirTV is sold at Circuit City and Best Buy. Radio Shack only amounts to some sales if it has the cheaper competitor.

Via wins this battle either way. Sooner or later Dish has to give in or fade away out of business. If they fade, but sign up a few weeks from now for more money they are never going to recoupe from this blow.

Charlie has stated that Via and Dish are on the verge of an agreement. I think this is not quite honest...but dont want to get in trouble on a message board for framing that in other terms. Charlie is totally trapped by all of it, not just his own actions.

Via is holding all the cards.

And if Charlies semi promises of signing a contract with via at any moment dont happen fast they there will be shareholder law suits against Dish in the next month or so. Charlie will probably be out of a job if he does not hold a large enough stake. In all likelihood Charlie does not hold much of the stock since it is mainly held by institutions.

Which brings up a different problem. While the stock has been doing well in the face of the problems, the institutions are hestitating to get out. But this will wear thin very fast. Dish has to be revalued by this fiasco in the very short term...like right away...and Dish may never regain any of the lost value. So sometime soon the institutional guys are going to figure this all out and dump the stock. The last one out will be left holding the bag.

Never mind the fact that the stock market is in a big sell off that has only just begun.

JMO

db
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It is a very interesting situation. Dish is the weakest media company.

Actually it's one of the strongest distribution companies. First is Comcast, with 20+ million subscribers. Then comes Time Warner with 12 million. Then comes DirecTV with 12 million, then Dish with 9 million.

Down below Dish are Charter, Cox, Adelphia, Cablevision, RCN, Susquehanna and a bunch of other fairly familiar names...
http://www.ncta.com/industry_overview/top50mso.cfm

The only ones on the list with significant content are Time Warner and Fox. Comcast has a teensy bit, although they're trying to get a bigger bite with Disney.

For instance when News corp's Direct TV goes to bid on content they can use Fox as leaverage against other players wishes for a price hike.

Maybe, I suppose. Are you saying that when Time Warner wants a hike for HBO, Fox will be able to say "Well, we won't carry HBO, we'll just offer the Fox Movie Channel instead."

I don't understand how this is different from what Dish is doing with CBS right now. And when it comes to Fox, Dish can simply say "OK, we won't carry FMC or FX or Fox Sports South or any of the other weaker Fox properties." Both guys - both distribution and content have a club. I hope they both start using them on each other to stop the incessant rate hikes from content providers, particularly ESPN (as tiny little Cox has threatened to do, and as happened with the Yankees and Cablevision in NYC last year.)

Via wins this battle either way. Sooner or later Dish has to give in or fade away out of business.

I don't see why. You think CBS can afford to give up 10% of the country for their distribution? I am pretty sure that the ad agencies which have agreed to ratings guarantees will be knocking on the door looking for make-goods from CBS and the Viacom properties soon. Dish's only exposure is the cancellation of subscribers, which may or may not happen over the short term. If the struggle goes on for a long time, then I agree they have some risk.

Charlie has stated that Via and Dish are on the verge of an agreement. I think this is not quite honest...but dont want to get in trouble on a message board for framing that in other terms.

Maybe. We will know when the fight is over and Dish either does or does not add Nickelodeon GAS (kids games and sports channel), which is what Viacom is trying to force onto the system. I haven't seen it, but it sounds like a pretty weak concept.

Via is holding all the cards.

On this one you're wrong. They have a good hand, but so does the distributor.

Dish has to be revalued by this fiasco in the very short term

As I have noted, I think Viacom has more short term risk, and Dish has more long term risk if the fight is protracted.

So sometime soon the institutional guys are going to figure this all out and dump the stock.

And that's what they say about every company that shuts down because of a strike or has a distribution channel pinched. Doesn't usually happen, because these things have a way of getting settled.
 

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Maybe, I suppose. Are you saying that when Time Warner wants a hike for HBO, Fox will be able to say "Well, we won't carry HBO, we'll just offer the Fox Movie Channel instead."


GH,

actually this whole thing gets inverted...and it is working out that way. What will happen is that rates will go up...but in News Corps case they love it because all of the services will have to up their rates...and yet Fox their content will bill all of the services more....

So Direct TV gets to charge more like its competition will....and Fox gets to charge more like its competition will.

As of this post Via and Echostar have settled all of it...court cases and contract....Via won and Dish is now carrying Nicktoons.....something they did not want.....I think there is a qualification like it only has to be broadcast with their 180 station package....not that bad a loss.......

Real loser is the consumer who will be getting rate hikes for years go come.....if my reading of what this greedy industry wants is right.....they are building in their costs higher and higher....

the contract between Dish and Via is a multiyear contract, but it is after the industry just went through a series of rate hikes....and we dont know if a series of future rate hikes are priced into the new contracts.....nothing is all that simple.....

db
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I don't understand how this is different from what Dish is doing with CBS right now. And when it comes to Fox, Dish can simply say "OK, we won't carry FMC or FX or Fox Sports South or any of the other weaker Fox properties." Both guys - both distribution and content have a club. I hope they both start using them on each other to stop the incessant rate hikes from content providers, particularly ESPN (as tiny little Cox has threatened to do, and as happened with the Yankees and Cablevision in NYC last year.)

Via wins this battle either way. Sooner or later Dish has to give in or fade away out of business.

I don't see why. You think CBS can afford to give up 10% of the country for their distribution? I am pretty sure that the ad agencies which have agreed to ratings guarantees will be knocking on the door looking for make-goods from CBS and the Viacom properties soon. Dish's only exposure is the cancellation of subscribers, which may or may not happen over the short term. If the struggle goes on for a long time, then I agree they have some risk.

GH,

actually it is all posturing by all the companies not just the two in this case...they all just want the top to be knocked off the cookie jar.....they want higher prices all around. After all eventually many of the players may end up merged...so does anyone really want a death blow?

I was posturing as well....I am short Dish.....

I think Dish will actually sell off quite well on the news....and with the market possibly crumbling around it......

db
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Me:Dish has to be revalued by this fiasco in the very short term

GH:As I have noted, I think Viacom has more short term risk, and Dish has more long term risk if the fight is protracted.

GH:So sometime soon the institutional guys are going to figure this all out and dump the stock.

GH:And that's what they say about every company that shuts down because of a strike or has a distribution channel pinched. Doesn't usually happen, because these things have a way of getting settled.

GH,

you were right...a guy can try cant he? It still will not surprise me to see a sell off of the Naz and of Dish.......based on the little bits of news such as the congressional pressure for a contract yesterday.....the stock has been holding up well......but now ironically there is not much to look forward to in this market.....

As I said there is not a full win for Via or for Dish...just qualification of what will be in what package that Dish sells. Perhaps both parties won...but will that matter tomorrow?

As for the institutional guys? Now I dont know what they will do or when. If the market sells off extremely hard here they may need to raise cash fast...but we dont know what will happen yet.....

db

PS Dish closed down today after being up in a down market all day. I think there was a lot of pressure to go up today from what was going on in congressional hearings. When the hearings were over the stock went down with the market at the end of the day. There will be no cover for Dish today.
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As of this post Via and Echostar have settled all of it...court cases and contract....Via won and Dish is now carrying Nicktoons.....something they did not want.

As usual, we disagree. Nicktoons is a viable channel; DirecTV added it over a year ago. The Cartoon Channel often places at the top of the ratings and has one of the highest customer satisfaction levels of any channel out there. Adding Nicktoons was not a big deal. (I note that Dish added it only to the "Top 180" package, the highest tier, and one for which people are already paying extra. Viacom will get not a penny from people who buy the lowest and middle tiers, which is the vast majority of their subs.

The channel that Viacom was demanding be added was Nickelodeon GAS, and I have seen no reports saying that they got the carriage they were seeking.

At the end of the day, I would say both sides lost at least a little. It brought into sharp focus the "media consolidation" issue, which I personally think is about time. There have been similar disputes before, but never in the climate where the issue has been on the front burner at the same time.

It also shines the light on the animus between distributors and creators, particularly between the networks, who have always thought they should be paid for carriage of their network product - and the cable companies (and later, satellite companies) who have steadfastly refused to pay for such use, offering other things instead (such as carriage of newly created channels.) Now it appears that that string has played out, and that the "carry this new ho-hum channel and pay us for it) may have reached the end of the road.

It'll be interesting to see where it goes next. All of that said, I dispute your characterization that "Viacom won." I think they both lost.
 
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