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Cable Operators

Dish Unbroken

1/13/2006 7:11 PM Eastern

EchoStar Communications Corp. chairman Charlie Ergen is never afraid to mix it up with programmers — or to drop their networks.

He briefly dumped a host of Viacom Inc. services, including Nickelodeon and the CBS broadcast-TV stations, in March 2004. Weeks later that same year, he threatened to delete a group of Turner Broadcasting System Inc. channels. In 2005, he yanked off Comcast Corp.’s OLN.

Ergen claims he’s going to get even tougher with programmers. With EchoStar’s Dish Network now at 12 million subscribers — and DirecTV Inc. now passing 15 million — Ergen maintains both direct-broadcast satellite providers can take even harder stances in negotiations with programmers. In fact, Ergen has already started playing harder hardball.

Topping the Scales
Top 10 cable and satellite operators:
Provider Subscribers
Comcast 21.5 million
DirecTV 15.0 million
EchoStar 11.7 million
Time Warner Cable 10.9 million
Cox 6.6 million
Charter 6.2 million
Adelphia 5.0 million
Cablevision 2.9 million
Bright House 2.0 million
Mediacom 1.5 million
SOURCE: Hoovers.com

On New Year’s Day, EchoStar dropped Lifetime Television and Lifetime Movie Network from Dish Network’s lineup across the country. Lifetime’s carriage deal expired Dec. 31.

Both parties couldn’t agree on a license-fee increase. EchoStar claims Lifetime is seeking what adds up to a 76% rate increase for Lifetime and LMN over the term of the new contract, as well as carriage of the Lifetime Real Women channel. Lifetime maintains that it only sought “modest” annual increases that amount to four cents a month per subscriber.

DirecTV hasn’t shied away from removing networks either. A year ago, it knocked off NBC Universal Cable’s pop-culture oriented Trio. The move, which eliminated half of Trio’s 20 million subscribers, was a death blow.

NBC Universal pulled the plug on Trio, turning it into an online-only service on Jan. 1.

Ergen claims that the balance of power between DBS providers and programmers has shifted. DirecTV and Dish now are the second and third largest distributors in the country, bigger than all cable operators except for No. 1-ranked Comcast, which has 21.4 million homes.

And Dish Network and DirecTV are still growing, each gaining roughly 1 million subscribers last year. The entire cable industry is not growing that fast.

That’s a far cry from the days when startups EchoStar and DirecTV were forced to pay “a DBS premium” in license fees, in order to secure initial carriage for networks such as Lifetime, Ergen told reporters at the Consumer Electronics Show earlier this month.

“We didn’t have any subscribers; we were a new industry,” Ergen said. “Now that the second- and third-largest MSOs in the country are DBS guys, it’s our opinion — compared to the DBS premium — we should get the same rate as cable.”

DirecTV, controlled by News Corp., agrees.

“We believe our license fees to programmers are still higher on a per-sub basis than our cable competitors, even those that are smaller than us,” said Dan Fawcett, DirecTV’s executive vice president of programming.

The DBS companies don’t want to continue paying a premium.

Last week, the EchoStar-Lifetime dispute kicked up a notch. Lifetime rallied women’s groups to its side for an ad campaign and protests in cities such Denver.

In Greenville, S.C., Councilwoman Lillian Flemming donned a “Drop Dish” baseball cap and spoke out in favor of Lifetime.

HOW SIZE MATTERS

The scale of EchoStar and DirecTV has additional impact on programmers when they negotiate for carriage. If they want to get a new channel off the ground, EchoStar and DirecTV are the fastest way to get national exposure.

“They [DBS providers] can give a channel instant national rollout,” said one cable network president who didn’t want to be identified. “Cable is often times a long process, and getting a network put onto systems takes months and months. With Charlie, man, you’re on — or off.”

Lifetime has seen its base of 89.5 million subscribers sliced as much as 14%. With its monthly license fee estimated at 18 to 20 cents per subscriber, this year the network could lose as much as $31.2 million — based on the old price — from EchoStar for that channel alone. Lifetime could win back some subscribers from Dish customers switching out to cable.

The Dish drop could also mean that Lifetime has to offer make-good spots to advertisers. Lifetime couldn’t be reached for comment as to the drop’s effect on its advertising revenue.

EchoStar will take a hit as well. At CES, Ergen acknowledged that Dish will lose subscribers for dropping Lifetime, but last week the company couldn’t say how many have switched out so far.

Cable operators, as well as DirecTV and wireless company U.S. Digital Television Inc., are already trying to take advantage.

INCENTIVE PLAN

Time Warner Cable began offering Dish subscribers $200 to switch to cable. Comcast Corp., Charter Communications Inc., Bright House Networks, Verizon Communications Inc. and DirecTV are also offering Dish subscribers “aggressive incentives to switch,” according to Lifetime.

The programmer was at a distinct disadvantage in its most recent negotiations with Dish. Lifetime is owned by Hearst Corp. and The Walt Disney Co., and in many cases Lifetime’s affiliation deals with distributors are tied to retransmission-consent agreements for TV stations owned by its sister company, Hearst-Argyle Television Inc.

But that wasn’t the case with EchoStar late last year: Carriage for Lifetime and the 28 owned-or-managed Hearst-Argyle stations, mainly NBC and ABC affiliates, weren’t linked together. According to a securities filing by Hearst-Argyle, EchoStar closed an agreement to retransmit those stations on Dec. 30. It agreed to pay cash to carry the stations.

Dish would never have dumped Lifetime the next day, Dec. 31, several industry executives said, if it had meant losing the Hearst stations, many of which were televising popular college football bowl games the next week.

“Lifetime was a network that got a lot of leverage from retrans,” one cable-network president said. “All of a sudden, they’re on their own negotiating. … Once you unhook a cable network from the power of retrans, its leverage goes way down.”

EchoStar, which negotiated new contracts for 319 channels last year, won’t comment on what deals it has coming up. One big contract that’s expiring for many cable operators this year is for Fox News Channel, but Dish’s deal extends to the end of 2009.

In its 2004 dispute with Viacom, EchoStar relented fairly quickly under public pressure. Taking on other popular programmers in the future would be a much riskier move for Ergen than dropping Lifetime.

“The question is, can he survive if he takes on a few more of these big companies?” the network chief said. “He can probably live without OLN. He can probably live without Lifetime. But what about ESPN? There’s a point where churn is going to go up.”

Mike Reynolds and Mike Farrell contributed to this report.

September