We Can Work It Out: DISH Network Not Spoiling to Fight Disney

As lawsuits pile up, carriage deal with ABC, ESPN set to expire

While the expiration of their carriage deal with ABC and ESPN is looming on the horizon, DISH Network executives said they aren’t spoiling for a fight with Walt Disney Co.

Speaking to investors at DISH Net’s fourth-quarter earnings call, CEO Joseph Clayton confirmed that the current carriage deal with Disney is drawing to a close—time runs out on the eight-year pact in September—before adding that he doesn't anticipate that ongoing litigation between the two companies would present undue complications.

“Yes, we do have a renewal with Disney. We are a big customer of Disney’s. I would not expect them to take [their signals] down with the AutoHop as the reason,” Clayton said, referring to DISH’s controversial ad-obliterating DVR feature. “That being said, anything can happen. But normally, greed prevails.”

DISH is embroiled in two legal actions against Disney. The first dispute, which includes the parent companies of CBS, NBC and Fox, is a bid to establish that the AutoHop feature is not in violation of U.S. copyright law. Opening arguments in the second case, a $152 million beef with ESPN, having to do with the network’s alleged breach of the terms of its affiliate agreement, began last week in U.S. District Court in Manhattan.

Despite the animus between the two parties, DISH Net co-founder and chairman Charlie Ergen said that any legal action shouldn’t hold up the carriage negotiations. “We have negotiations every year with major programmers—some that we’re in litigation with—while we have contracts going on,” Ergen said. “And we’ve always been able to work through those issues. Because ultimately, content going down is a lose-lose for both us and the content provider.”

With an average charge of $5.26 per customer per month, ESPN boasts the highest sub fee in the industry. That the network stands to rake in as much as $6.23 billion in sub fees this year is a reflection of its investment in live sports (arguably the last great necessity of ad-supported television) and an unblemished record of negotiating its distribution agreements.

While operators are forever sounding the alarm on rising sports costs destabilizing their business model, it’s worth noting that none of them balk in the face of ESPN’s monthly fee. In the last two years, the affiliate sales team has inked long-term renewals with Time Warner Cable, Comcast, Cox, Charter, Cablevision, Verizon FiOS and AT&T U-verse—all of which were sorted out without the usual run of public brinksmanship or service interruptions.

Of course, Ergen cannot be categorized in the same phylum as every other distribution boss. Never one to shy away from a fight, the DISH Net chief is also a canny calculator of probability, having once made his living at the blackjack table. Over the past decade alone, he has scrapped with the likes of Viacom, The Weather Channel, AMC and a number of New York regional sports networks, and has always lived to fight another day.

Ergen did suggest that he can envisage a change in cable’s current business model, with sports being corralled in a stand-alone opt-in tier. And while he said this would present “a long-term problem for Disney,” the manner in which the company has leveraged its digital rights should keep them well ahead of the game. (Again, Ergen said a deal would likely get done before the September deadline, predicting that “a workable solution” would be worked out, largely because “our checks are pretty big.”)

As for the Hopper, Ergen argued that DISH Net’s intentions are badly misunderstood. “With DVRs, all models of DVRs, all pay-TV providers skip commercials, customers skip commercials,” Ergen said. “We can't ignore that fact. What we’re really saying to the broadcasters is, ‘There’s a way for you to not put your head in the sand. There’s a way for you to certainly I believe make more money than you make today from DVRs, from [targeted] advertising.’”

Ergen added that if broadcasters were to work with DISH to develop smarter targeting solutions, the ensuing ad model would work for all parties concerned—consumers, content owners and distributors. One way or the other, Ergen said, the networks have to pull their heads out of the sand: “The advertising model is going to change, with or without the Hopper.”

In the meantime, the Big Four broadcast nets remain diametrically opposed to the ad-zapping technology—so much so that they refuse to air commercials promoting the service. “All prime-time networks—Fox, ABC, CBS and NBC—have rejected our spots,” Clayton said. “Not just the AutoHop spots, but all Hopper spots. Cable TV is taking our spots.”

DISH Net reported full-year 2012 earnings of $14.3 billion, marking an increase of 2 percent versus the previous 12-month period. Net income plummeted 58 percent to $637 million compared to $1.52 billion in 2011, as higher programming costs, increased subscriber acquisition expenses and a $700 million settlement with Cablevision ate into the company’s earnings.

Having closed out the year with 14.1 million subscribers, DISH Net is the nation’s No. 3 operator behind Comcast and DirecTV.