EchoStar-Viacom: Content Still King

Mar 15, 2004  •  Post A Comment

In the aftermath of the war between EchoStar Communications and Viacom, one thing is certain: Content is king, and as Mel Brooks put it in “History of the World, Part I,” it’s good to be the king.
The general consensus among Wall Street analysts last week was that in the latest battle between content providers and distributors, content was the resounding winner. And that reality might lead other cable and satellite operators to think twice about dropping channels during a carriage fight.
Indeed, several observers said that the longer the Viacom-owned stations and networks stayed dark on EchoStar’s DISH Network service, the more pain the satellite operator would have felt as consumer ire translated into subscriber defections to other satellite operators-or worse, cable.
As Lara Warner, an analyst at Credit Suisse First Boston, noted, “At the end of the day, EchoStar must have Viacom/CBS content because it is unique and most customers are not willing to live without it.”
Indeed, with a stable of assets that includes MTV, Nickelodeon, Comedy Central and CBS as well as the broadcast network’s telecast of the popular NCAA men’s basketball tournament beginning March 18, Viacom came to the negotiating table with a number of arrows in its quiver, and as such was generally viewed as having an advantage over EchoStar in the negotiations.
Simple `Arithmetic’
As Banc of America Securities analyst Douglas Shapiro pointed out, the consequences to Viacom of a blackout of its channels is “arithmetic,” since it stood only to lose advertising revenue during the stalemate. For EchoStar, however, Mr. Shapiro described the impact as “geometric,” with the satellite operator facing the possibility of losing customers permanently.
It was something that wasn’t lost on executives at the biggest cable system operators and other satellite networks. Viacom’s campaign to make its point, which included a crawl on TV screens that was seen by all cable customers (not just DISH viewers) and newspaper ads, had the phones ringing at cable systems nationwide. The message that Viacom’s content gave it muscle was definitely received.
So while EchoStar and Viacom ended the two-day blackout of Viacom-owned networks early Thursday when they reached a new carriage agreement, the impact of what happened lingers.
While both companies claimed the long-term pact had given each side some wins, Viacom was seen as having come away from the deal with exactly what it wanted: EchoStar’s agreement to accept a suite of Viacom networks in exchange for carrying CBS, and a commitment from the satellite operator to add cartoon network Nicktoons to its lineup.
EchoStar CEO Charlie Ergen acknowledged as much. “We didn’t get as good a deal as we wanted, but we got a deal that was good enough,” he said. “Certainly, we didn’t want to add another cartoon channel, since we have several up there, but it was very important to Viacom, and they’ve gotten people to concede to launching that channel.”
Mr. Ergen said the agreement to carry Nicktoons would likely reduce the chances of other channels such as Oxygen and PBS Kids ever getting on the DISH Network. But he said he can claim some victory, particularly on the issue of direct broadcast satellite pricing.
“EchoStar and DirecTV pay considerably higher fees than smaller cable companies,” he said. “In this long-term relationship, we are being treated fairly.”
While Mr. Ergen declined to provide details of the new carriage agreement with Viacom, he said he would not challenge comments from Viacom that described the new programming-fee increases as being an additional 6 cents per subscriber per month. He also said the contract’s length is somewhere in the range of three to seven years.
Separately, EchoStar has delayed the release of its fourth-quarter financial results until after it resolves an inquiry by the Securities and Exchange Commission into how the company accrued funds to cover the replacement of smart cards used in set-top boxes. The company hopes to file its Form 10-K full-year financial report by March 30.
The issue centers on how EchoStar accrued a liability for smart cards that were used in satellite receivers that were leased to customers. The SEC concluded that the company over-accrued $17 million and $9 million for the smart-card replacement in 2001 and 2002, respectively, and that EchoStar could be required to restate its 2001 financial results, though the result would be a narrower loss for that year.
The company from 1996 to 2002 established a reserve to cover the replacement of the smart cards, which were included in satellite receivers sold and leased by EchoStar that had become obsolete due to piracy. While the SEC said the accrual was appropriate, it said EchoStar was incorrect to accrue a liability for the smart cards that were included in receivers that were owned by the satellite company and leased to customers.