Satellite

Top EchoStar Execs Dish About The Then and Now

4/21/2006 8:00 PM Eastern

In the 10 years since EchoStar Communications Corp. launched its Dish Network direct-broadcast satellite service, the company has slowly changed its image from upstart to power player, earning the spot as the third-largest multichannel video provider in the country.

Earlier this month, Multichannel News contributor Monica Hogan interviewed EchoStar founder, chairman and CEO Charlie Ergen, along with co-founder and executive vice president Jim DeFranco and vice chairman Carl Vogel. An edited transcript follows:

MCN: Congratulations on the 10-year anniversary of Dish Network. Are you still having fun?

Jim DeFranco: You bet. I’m having fun every day.

MCN: What are some of the biggest risks you’ve taken on behalf of Dish Network?

Charlie Ergen: It probably started with making the decision to transition from the big C-band dish to the small dish and all that encompassed. We had to take our team and our efforts and focus on a smaller dish at a time when there was still a very robust big-dish business.

That culminated with three big risks we took.

One was something everybody knows about: the Chinese launch. That was pretty much an all-or-nothing bet as to whether we would remain in business.

The second was to raise the debt to finance that. Had the launch been unsuccessful, the bondholders would have owned the company.

The third was to develop our own technology, and not rely on third parties to develop the actual digital compression technology and encryption systems.

MCN: Was it ever an option to have third parties engineer the hardware for Dish?

Ergen: We engaged with some third parties, but our team said they could do it, and we ultimately placed the bet on our engineering staff to do it themselves.

There were other big companies like Philips and RCA/Thomson that had the horsepower to do it. We had a fairly small, dedicated engineering team at that time. They said they could compete with those larger companies, and Jim and I made the decision to bet the company on our own engineers.

Those were three pretty big bets. All three of those had to be successful for us to remain in business.

MCN: Was there a certain point during the past 10 years when you realized that the risks had paid off and that Dish Network would be viable?

DeFranco: Actually, it was the first two satellite launches that were important for us to be successful.

Ergen: When we started our service in March 1996, and when we pulled the switch to turn the service on and it worked, with all the engineering that our guys had done, we had a good feeling that we’d be successful.

At that point, DirecTV [Inc.] had proven the business model. They had already been in business two years before us.

We were the first to use true MPEG-2 [Moving Picture Experts Group] anywhere in the country. By early 1996, we felt like we had overcome the devastating risks.

MCN: Why do you think you have outlasted some of the larger corporate players that were interested in DBS 10 years ago?

Ergen: I don’t know that we’ve outlasted them, but there is an advantage to having a focused business and a team of people focused on a common goal.

We were fortunate. We now have 20,000 employees, but at the beginning, Dish Network had about 2,000 employees, and those people have remained focused on the goal at hand, which is to deliver outstanding video service to the people of the United States.

DeFranco: In addition to that, because we’ve been in the satellite business for 25 years, in those first 15 years, we’d built a lot of relationships that we continued to have over the past 10 years with Dish Network.

When you look at our retail distribution and the distributors we’ve worked with around the country, we have longstanding relationships there.

In the first 15 years of EchoStar, we were able to build confidence in them that we were good business partners. While we launched two years behind DirecTV, they could have confidence that we would do the right thing in the interest of the consumer and in the interest of retail distribution.

MCN: What are your proudest moments at Dish Network?

Ergen: For me personally, it was the [EchoStar I satellite] launch. It was the culmination of 15 years of work.

The launch didn’t happen in that 20 minutes while you’re launching a satellite. It was the 15 years when a lot of people had to do a lot of things.

The second moment was when we turned the system on and it worked.

MCN: Where were you when you turned the system on?

Ergen: We were in Las Vegas, at a satellite show.

The very first thing we broadcast were the names of our dealers that had supported us for the 15 years prior to that. The very first thing that was on Dish Network was a list of several thousand retailers who had helped build the company.

MCN: What are some of the more unusual things you’ve done to cut costs for Dish Network?

Ergen: First of all, we don’t pay ourselves very much money. [In an SEC filing dated April 7, EchoStar reported Ergen received a salary of $411,538 in 2005; the bulk of his compensation was in stock options.]

We’ve tried to create a culture from day one for our employees that [says] we should spend money where it affects our consumers and we shouldn’t spend money where our customers wouldn’t care.

As an example, if you were to go to one of our uplink centers, you would see absolutely state-of-the-art broadcast equipment, back-up generators, fiber optics, everything that would be as good technically as you can find in the marketplace today.

But if you came to Mr. DeFranco’s office, you wouldn’t see a wooden table, you’d see a table and a desk that’s laminated, because our customers don’t care whether he has real wood. You might see used furniture.

When you call Dish Network for customer service, you’re talking to one of our employees. You’re not talking to a third party. Those things if executed properly will save cost, but they’ll also deliver better customer service.

In general we try to put money where it affects our customers, and save our money where they don’t see a difference. We’re a relatively frugal company when it comes to day-to-day operations.

MCN: What are the biggest challenges to Dish going forward?

Carl Vogel: We need more product to sell.

There’s a lot of noise around broadband. We continue to look at that as a potential option. The biggest challenge is continuing to maintain the position we’ve got in the market.

When I was here in ’96, we were the third guy in. We had a low-cost structure and a business model that was price sensitive on a packaging standpoint, and we want to make sure we maintain that.

Beyond the strategic elements, we want to make sure we do the best we can do with video. And if you see from the financial numbers at EchoStar, we do pretty well once a month and quarter-to-quarter and year-to-year with a single product.

As we go forward, we need to make sure we make the right decisions that address the needs of our core customers and not get too far ahead of ourselves on things that may sound good and may be where the futurists are thinking but don’t necessarily add too much value in our business today.

Broadband is important to us.

We like portability through our PocketDish. You’ll see more and more people use the product outside the home, so we think that’s important to us.

Our view is doing the best we can with video, being smart about how we bring a broadband product into the mix, being smart about how and when and how much, and then doing the best we can to be true to our roots in terms of the cost effectiveness of our programs and giving portability and mobility options as well.

There are always challenges in competition. There are always challenges of managing the expectations of the markets with the realities of the day-to-day business.

Sometimes there are a lot of discussions about good ideas, but are our customer base and the market ready for that?

The challenge we have in management is to make sure we think through how we deliver those products to the market and how that impacts our core business.

Ergen: To summarize what Carl said, the challenge for us it to really stay on top of the Internet, broadband, new technologies and how they might affect our business.

That’s nothing different today than it was when we were trying to sell big dishes and had to stay on top of technology at the time. I don’t imagine that ever changing in the business.

Technology moves faster today than it did 25 years ago, so those decisions are more complex than they were. But as a company we understand technology much better today and we’re actually much better positioned to make technology decisions than we were in the past.

MCN: What are your options for broadband?

Ergen: We don’t talk about our strategies. Broadband is obviously an issue in the marketplace. It’s unclear how satellite will play in that arena.

MCN: Do you expect to be with Dish another 10 years?

DeFranco: God willing. As long as I’m healthy.

MCN: Charlie, of all of you, you’re so closely associated with the Dish Network brand. Is there a point at which you would consider walking away from the company, either to retire or in a merger situation?

Ergen: As long as I can do a good job and I’m the right person to lead the company, I hope I can stay here.

That doesn’t mean I’m always going to be the right person to lead this company. When there’s somebody better to lead this company, I’m happy to put him in that position.

Vogel: It’s funny; we got asked that question 10 years ago.

Ergen: And the answer is still the same: Monica, if you’re the best person to run this company, and you can convince our board of directors you’re the right person, I wouldn’t stand in your way.

MCN: (Laughter) That’s good to hear. I don’t think that’s going to happen anytime soon.

MCN: Do you foresee a merger in Dish Network’s future? If so, who are the most likely candidates for a merger?

Ergen: We’re probably the only telecom company that’s been denied a merger in the last five years. We’ve attempted a merger with DirecTV and been denied.

Our focus has been in growing the company internally.

If there are opportunities to improve our business through mergers and acquisitions, that’s Carl’s focus and something we’ll always take a look at.

But we’ve had spectacular growth over the past 10 years building from within, and we think we have the same kind of opportunity in the next 10 years.

And perhaps we’re a little gun shy. It’s a little disappointing to see $50 billion companies merging, almost riding through the legal and justice departments, when a merger that would have allowed us to compete was held up.

We realize there are obviously differences between each merger. But we don’t have the best track record in Washington. We’re the wrong guys to ask about this stuff.

Vogel: The best thing we can do is to continue to focus on running the business. And as you can see 10 years ago and now, when you do that, our company has lots of options.

One of the attractions to me to come back to EchoStar is I really don’t think Charlie is going anywhere. He’s not the retiring type.

And I know Jim agrees with me.

It’s incumbent upon us to continue to build this asset, and as opportunities present themselves, we have flexibility to address those opportunities.

I can tell you we’re not out actively trying to move the company; we’re trying to move the business forward so we have an attractive asset on whatever we do from the capital structure perspective.

MCN: Can you see the political climate changing enough to allow a merger between DirecTV and Dish? Would such a merger make more or less sense than it did four years ago?

Ergen: I personally thought that in 2002, given the competitive nature of communications and where it was going, the merger would be approved.

We weren’t successful.

The market is more competitive today than it was in 2002. You certainly have the entrance of the largest telephone companies getting into the business.

But we’re the wrong guys to ask when it comes to Washington. We’re literally zero for a hundred.

I don’t think we’ve won on any major item at Congress or the [Federal Communications Commission] yet, and there’s no reason to believe we’d ever win.

MCN: What about what you’ve done on local to local?

Ergen: We’re very proud of that, but we only prevailed on local to local when the broadcasters and DirecTV joined our fight.

For the first year we fought for local to local, the broadcasters testified against us, and DirecTV testified against us for the first two years.

It was only with their support that the legislation passed.

In Washington, you need a consensus between industries and companies, unless you’re as powerful as the broadcasters association is or perhaps the phone companies. They sometimes can win by themselves.

But our company is just not that strong.

MCN: You’ve said that you’re in favor of a la carte programming options for your customers. How you would price and promote a la carte if your contracts with programmers allowed it?

Ergen: That’s a big if. The fact of the matter is that most major programmers do not allow it. As a company, we believe that what’s good for our customers is good for our business.

Jim and I, since day one in the C-band business, sold a la carte. Everything in the C-band business was sold a la carte, and that was one of the reasons we were able to sell big dishes.

We believe the chairman of the FCC [Kevin Martin] and the people in Congress are on the right track to allow customers to buy only what they want to watch. I think it would be good for consumers and would be good for our business.

That is what the Internet allows you to do today. Some broadcasters today do not allow cable or satellite companies to sell a la carte, but they themselves sell a la carte on the Internet. And we don’t think that’s fair.

So we’ll continue to fight for a la carte rights in the Congress because we do think it takes legislation to mandate it. Programming contracts today typically don’t for the biggest programmers allow you to sell just what customers want to watch.

It’s a shame that in family packages, in some cases, you’re not allowed to put only a family channel without putting some adult content at the same time. So the family pack can’t be as good as you’d like it.

We’re in the minority today on this issue, but we believe it’s good for consumers.

MCN: Is there anything you’d like to add about Dish Network’s first 10 years?

DeFranco: I look at the opportunity we’ve provided for our employees, not only 25 years ago, but also 15, 10 and even currently, for someone to join the organization and be able to have a significant influence over where we go as a company and have an opportunity to grow and not only achieve personal satisfaction in what they accomplish but also financial security for themselves and their families.

I look back at some of the people who started many years ago, and I believe this opportunity still exists today.

We had people who started at various parts of the company, whether it’s people who started in our call center and are now vice president and they started as an agent on the phone, or many years before that started as a person in the warehouse and have grown to be directors or agents in the company.

There are independent retailers out there that we’ve helped to grow, small, medium and large businesses. It fosters the entrepreneurial spirit we had when we started but also gives them financial opportunity to be successful and provide for their families.

Vogel: I was here 10 years ago, and I left, and I came back.

The will to win is something I’ve never seen in my history, and I’ve been around a lot of organizations.

That will has been permeated throughout the organization, which is a big part of the success that EchoStar has enjoyed.

It’s not only for our employees and some of our dealers. EchoStar has been good for the industry in many ways.

We were out there early with digital. As did DirecTV, we provided an alternative for programmers to level the playing field in negotiations. In many cases, EchoStar was there early with digital capacity that allowed programmers to launch brand extensions and bring more and more product to market.

When I reflect on the last 10 years and where we were 10 years ago and where we are today, this has been a company that has touched a lot of people in a very positive way. For its employees and dealers and programmers and shareholders and bondholders, EchoStar has returned significant equity appreciation for the people that were there 10 years ago. That’s a good story.

Many people thought we were crazy when we started the DBS business 10 years ago, and we probably were.

The organization led by Charlie and Jim has overcome a lot of adversity and delivered a lot of product, and I think a lot of the credit goes to the guys at the top.

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