Disney Armed With ESPN Cudgel in Next Pay-TV Fee Showdown

Disney Armed With ESPN Cudgel in Next Pay-TV Fee Showdown

Now that CBS Corp. has prevailed in its monthlong dispute with Time Warner Cable Inc., it’s Bob Iger’s turn to see how much his Walt Disney Co. can squeeze from a pay-TV carrier.

Disney, owner of the most-expensive pay-TV channel in ESPN, faces a Sept. 30 deadline to reach a new agreement with Dish Network Corp. (DISH), the second-largest U.S. satellite-TV provider. The negotiations cover how much Dish pays for content and whether it can put programs on mobile phones — the same sticking points that led to the one-month blackout of CBS on Time Warner Cable systems that was resolved this week.The outcome of those talks bodes well for Iger, Disney’s chairman and chief executive officer, and other content owners. CBS CEO Leslie Moonves won significant price increases while holding on to digital rights. Disney especially is buoyed by ownership of sports network ESPN — a must-have for pay-TV providers like Dish, which are struggling to keep expenses in check while online players such as Netflix Inc. siphon viewers.

“Even grandmas watch a lot of sports, so it will be difficult for Dish,” Matthew Harrigan, an analyst at Wunderlich Securities in Denver, said in an interview. “ESPN and Disney are in a great bargaining position.”

Dish Chairman Charlie Ergen said last month he wants new mobile rights for channels including ESPN, while holding down costs. The company’s operating profit margin of 13 percent over the past 12 months trails its three biggest peers, including Time Warner Cable’s 22 percent, according to data compiled by Bloomberg. Ergen has floated the idea of dropping ESPN if he can’t reach a deal.

“Charlie has been more aggressive saying he is resisting cost increases for sports than anyone else,” said Harrigan, who has a neutral rating on both companies.

Online Choices

In addition to pay-TV providers, Dish competes with new online options that have emerged as broadband networks improve. Now Netflix and Amazon.com Inc. are buyers of content, as well as tech companies like Intel Corp. and Sony Corp. that are working on Web-based TV products. That’s putting upward pressure on price.

Meanwhile, 366,000 pay-television subscribers in the U.S. canceled their subscriptions in the second quarter, leaving total accounts more than 200,000 below mid-2012, according to researcher SNL Kagan. Dish, based in Englewood, Colorado, shedded 78,000 TV customers during the quarter, and may not be able to afford to lose ESPN.

Bigger Blackout

“ESPN is among the most powerful subscriber attraction and retention tools distributors have at their disposal,” Todd Juenger, an analyst at Sanford Bernstein & Co. who recommends Disney shares, wrote in a research report.

A blackout of Burbank, California-based Disney would affect 14 million Dish subscribers, more than four times the 3 million affected in the Time Warner Cable-CBS dispute.

Bob Toevs, a Dish spokesman, and Disney’s Kevin Brockman declined to discuss details of the negotiations.

Disney, the world’s biggest entertainment company, rose 0.2 percent to $61.39 today in New York. It has climbed 23 percent this year. Dish added 0.7 percent to $46.62. It has advanced 28 percent in 2013.

The companies are bargaining against a backdrop of lawsuits. In March, Dish lost three of four claims against ESPN over its programming contract, winning a jury award of $4.85 million of the $153 million sought.

Legal Wrangling

There’s also a court battle over the satellite-TV provider’s AutoHop feature, which allows subscribers to skip broadcast TV commercials. ABC is one of the TV networks trying to shut it down, which will add a wrinkle to the talks, said Doug Creutz, an analyst at Cowen Securities LLC.

“Disney is not on board with Hopper,” said Creutz, who has a neutral rating on Disney.

ESPN charges about $5.54 a month for each subscriber, making it the most-expensive basic-cable channel, according to SNL Kagan. Ergen said last month he’s optimistic about a deal with Disney, though a pay-TV provider may one day walk away from ESPN to offer a lower prices to consumers.

“We’ll work, first and foremost, to find a deal with Disney that makes sense,” Ergen said. “If we get that deal, we’ll do it. If we don’t get that deal, we’ll part ways. Simple as that.”

ESPN recently reached agreements with several distributors without incident and the network is on a path to do so with Dish, John Skipper, the network’s president, told reporters at an Aug. 21 press event.

‘Never Confident’

“You’re never confident until midnight,” Skipper said. “We’ve had very constructive discussions.”

Another potential sticking point is ABC. With many viewers watching through pay-TV systems, station owners are demanding more money from cable and satellite operators for access to signals broadcast free over government-owned airwaves.

Time Warner Cable agreed to pay CBS about $2 per subscriber each month for retransmission rights, according to Jessica Reif Cohen, an analyst at Bank of America Merrill Lynch. CBS is now receiving fair compensation from Time Warner Cable, CEO Moonves said. More than 10 cable channels with lower ratings were receiving more, he said.

“If you provide great content, you should get paid for it,” Moonves said in a Bloomberg Television interview. “The networks will take that and use a similar argument.”

‘Greatly Relieved’

Britt, Time Warner Cable’s CEO, said he didn’t get everything he wanted and called on Congress and the U.S. Federal Communications Commission to reassess 1992 retransmission consent rules that allow broadcasters to charge for their signals.

CBS also withheld out-of-home rights for the broadcast network from Time Warner Cable, allowing the network to sell them exclusively to an online player, people with knowledge of the situation said.

“Our landscape is changing drastically and rapidly,” with sales to Netflix or Amazon more important, Moonves said. “We are greatly relieved that our hands are not tied.”

Disney has taken a different approach with its Watch ABC application, which allows streaming of live TV to customers of pay-TV providers including Comcast Corp., Charter Communications Inc. and AT&T Inc.’s U-verse. While mobile rights aren’t separated, they increase the value of programming.

Ergen has been tough in negotiations, dropping AMC Networks Inc. last year for three months before a lawsuit settlement, and Viacom Inc. in March 2004 for less than a week.

“Maybe he takes a shot at losing ESPN to see what happens,” said David Bank, an analyst at RBC Capital Markets in New York, who has a “buy” rating on Disney shares. “He’s proven he’s willing to take risks.”

To contact the reporters on this story: Alex Sherman in New York at asherman6@bloomberg.net; Andy Fixmer in Los Angeles at afixmer@bloomberg.net

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 (www.heroinnovator.com), 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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