Ergen: Threat of Lengthy Appeals Led to Voom Deal

Merger with DirecTV Not Being Discussed, but Worth Considering
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Decisions by the judge gave Dish Network very little chance to win its lawsuit against AMC Networks and its Voom HD programming venture, leading to last month's $700 million settlement, Dish Network Chairman Charlie Ergen said.

Answering questions during Dish's third-quarter earnings call, Ergen said Tuesday Dish probably wouldn't have lost as much money as Voom was seeking-about $2.4 billion-if the case had gone to the jury.

But even after a verdict, the case would have gone on to appeal for another three or four years, and Ergen wanted to avoid that expense and distraction.

"Based on our experience in TiVo, we ended up with TiVo where we probably could have ended up five years earlier," Ergen said, referring to a $500 million settlement Dish made with TiVo after five years of legal wrangling. "And we wasted a lot of time for lawyers and management time on something that probably could have been settled."

As part of the settlement, Dish agreed to a new distribution deal with AMC which had been taken down over the summer. With AMC's networks off the satellite service, Dish lost subscribers during the quarter. Without the AMC dispute, it might have gained subscribers, Ergen said.

Analysts believe Dish paid AMC a bigger subscriber fee that it would have if it weren't for the lawsuit.

"If AMC continues to produce shows like Walking Dead, which is kind of off the charts in terms of people viewing it, then that will be a fair deal for us. If they stub their toe, then we probably paid too much for their programming going forward,"

Analysts asked Ergen about a potential merger with satellite competitor DirecTV. "

"Obviously it's one of the things both companies have to consider, Ergen said. "You've got a basically mature video business that's very competitive with the power structure being more on the programming side than the distribution side and almost unlimited distribution power coming from broadband and the Internet, which neither one of us have a lot of assets in. So I think it's something both companies would look at."

Ergen emphasized that "first of all we're not having discussions about that. It's not an active thing."

He added that the likelihood of a merger wouldn't be impacted by the election. "I don't think either administration if a transaction made sense, I don't think either administration would block it, if it made sense, if it was good for the American public. If it wasn't both administrations would block it," he said. "My personal opinion is it's probably a doable deal no matter who the administration is under certain circumstances. And there are probably certain circumstances where it's not a doable deal."

Ergen was also asked about the Auto Hop feature on its Hopper DVR, which is the subject of a lawsuit from the broadcast networks.

"You've seen a couple of broadcasters talk about the fact that the DVR is their friend and the Hopper is just a better operating DVR," Ergen said.  "The dirty secret is that about half the people skip commercials whether it's the Hopper or somebody else's [DVR]. We just allow you to do it with pushing the one button. Somebody else makes you push the button three or four times."

"Ultimately the broadcasters are in fact our partners. We're not going to go out there and try to do something that would be, at least knowingly, that would be very harmful to their total economic model because we want broadcasters' content. It's something our customers want," Ergen said.

"I think there's other things you can do once the litigations over" to address ad skipping, Ergen said. For example, "we can target ads to customers so people don't want to skip them and do it in a way that customers feel better about and want to watch more commercials."

But solutions will have to wait till the litigation ends. "We don't always take principled stands, but the fact of the matter is we believe the American public has the right to change the channel. We think they have the right to record a show. And we think they have a right to push a button to skip a commercial," Ergen said.

"When my kids were young I didn't want them watching those commercials. Some are very offensive, so I think you have to have the right to skip the commercial. And I think that's where we differ today. We think the broadcasters, at least in the lawsuit, have said no, customers don't have the right to do that. And I think we have to take a stand for the consumer because if we don't, nobody else is going to do it. So I think it's one of the things customers like about Dish."

For the third quarter, Dish reported a loss of $163 million, or 35 cents a share, compared to net income of $319 million, or 71 cents a year ago. Revenues fell 0.8% to $3.5 billion.

"Third quarter results continue to point to a company whose core business is still struggling... badly," said analyst Craig Moffett of Bernstein Research.

"Efforts to stabilize subscriber losses have largely worked, leveraging a relatively successful marketing effort centered on their multi-room Hopper DVR," Moffett said. "Gross additions of 739,000 were a bit better than consensus expectations of 705K, and were up 12.7% from a year ago. So far, so good."

But Moffett added that improvements in lowering churn rates appear to have stalled. "Churn of 1.80% was down 3 basis points from last year, but was 6 basis points above Wall Street consensus of 1.74%," he said. "Dish's steady litany of programming disputes, including their well-publicized one with AMC (which cost Dish subscribers the premieres of Breaking Bad and uber-hit Walking Dead before finally being settled) undoubtedly hurt results here."