Dish, Disney Gird for Showdown Over ESPN

Updated September 4, 2013, 8:56 p.m. ET

Dish, Disney Gird for Showdown Over ESPN


Dish Network Corp. DISH +0.13% chairman Charlie Ergen has long railed against the high cost of sports on TV. Now he has a chance to do something about it. Dish’s agreement to carry ESPN, the highest profile and most expensive of the national sports channels, expires at the end of September. Dish and ESPN’s majority-owner Walt Disney DIS +0.30% Co are now in negotiations on a renewal for the agreement, which dates back to 2005. The talks will also address the fees Dish must pay to carry Disney’s other channels, including ABC broadcast stations. As a result, the negotiations will likely revolve around some the pay-TV industry’s most contentious issues—broadcast fees and sports costs—even more than Time Warner Cable Inc.’s TWC +0.60% battle withCBS Corp., CBS +2.06% which ended just Monday after a monthlong blackout.“There’s an unsustainable pressure in the TV ecosystem, and it’s just amplified when it comes to Dish and Disney,” said Tony Wible, an analyst at Janney Montgomery Scott.

Mr. Ergen last month already hinted at his willingness to use what some might see as the nuclear option—going without Disney’s channels permanently. “Disney is not going to go out of business without Dish Network and vice versa,” he told analysts on a conference call.

He added that, taking a “really long-term view,” a pay-TV provider could offer TV service without sports channels. “We’re prepared to go either way,” he added. Dish will try to strike a deal “with Disney that makes sense for our customers.” But “if we don’t get that deal, we’ll part ways.”

Dish is looking to “get a fair price” and “be treated fairly,” he said, while Disney would like to “increase the amount of money we pay them.”

A Disney spokeswoman said, “We continue to have constructive conversations with Dish” and added that “Disney’s suite of networks and services are hugely popular with viewers.” A Dish spokesman referred to Dish Chief Executive Joe Clayton’s comments in August that “we are engaged” with Disney and “moving…to a favorable solution for both parties.”

ESPN argues it is helping pay-TV operators retain customers at a time when NetflixInc. NFLX +1.19% and other online outlets that offer on-demand entertainment programming could provide an incentive for consumers to drop connections. ESPN is “holding the pay television model together,” ESPN President John Skipper said in a recent interview.

Further complicating matters is the recent contentious history between the two companies. ABC is one of several broadcasters which have sued Dish over its “Hopper” digital video recorder that allows automatic ad-skipping and automatic recording of prime time broadcast TV. ABC’s motion to shut down those Hopper features is pending in a New York federal court.

Earlier this year the two companies fought another acrimonious court battle over a contractual dispute. The case revolved around whether Disney favored other distributors over Dish in its contracts. But it also highlighted Dish’s frustration at having to buy a package of ESPN channels including the low-rated network ESPN Classic, which the satellite operator said just 0.5% of customers watch. Dish lost all but one of its claims.

Mr. Skipper said pay-TV packages provide customers a “fabulous value,” and said selling channels individually, an idea Dish has backed, wouldn’t help consumers. “The strongest channels would have to charge more,” he said at an ESPN media event last month.

The stakes are high for both. ESPN and its suite of channels now generate $7.2 billion a year in subscription fees, according to Needham Insights, and are the biggest component of the cable networks unit that generated two-thirds of Disney’s operating income in the quarter ended June 29. Dish is the third biggest pay-TV operator, with 14 million subscribers, equivalent to 14% of the homes that currently receive ESPN. ESPN already has agreements in place with seven of the top 10 distributors.

A blackout of any length would be a major challenge when ESPN is already dealing with sagging ratings and competition from the recent launch of 21st Century Fox’s new 24-hour sports channel Fox Sports 1, not to mention competition from Comcast Corp.’s NBC Sports and CBS Corp. (21st Century Fox until June was part of the same company as Wall Street Journal parent company News Corp.)

Dropping ESPN would be a tough call for Mr. Ergen. In a survey by Lazard Capital Markets, 35% of respondents said they would cancel their pay-TV service or switch providers if ESPN weren’t in the lineup. “No one is going to be a meaningful player in this industry without carrying ESPN,” Lazard analyst Barton Crockett said.

Dish, which has already struggled to retain video subscribers in recent quarters, would be especially hurt by accelerated pay- TV cancellations, as it doesn’t also sell voice or broadband services competitive with rival cable and phone companies.

Mr. Ergen has played down the long-term negative impact of dropping sports channels. Disney accounts for a “disproportionate share” of Dish’s programming costs—well over 40%—but less than 20% of viewing minutes, he told analysts last year. By dropping a sports channel, a pay-TV provider could have a “materially lower price for customers and while they’ll lose customers initially, they will gain customers long term,” he said last month.

Digital rights are likely a big topic for Disney and Dish, just as they were for CBS and Time Warner Cable. Dish has said it sees value in online streaming rights for Disney’s channels, but it is unclear whether it is willing to pay more for them. ESPN disclosed during the court case with Dish earlier this year that it charges Time Warner Cable and Verizon’s FiOS 19 cents more per subscriber per month than Dish for carriage deals that include streaming rights, according to a court transcript.

That translates into “millions and millions of dollars” over the course of a year, an ESPN executive said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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