Networks Face Tough Talks Ahead

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Charlie Ergen has historically driven a hard bargain with programmers — going to court, if necessary, to wage battle against them, cable-network officials claim.

So last week, these programmers — and some cable operators — didn't relish the prospect of EchoStar Communications Corp. chairman Ergen increasing his leverage by amassing 16.7 million subscribers through his proposed purchase of DirecTV Inc.

"Bigger [distributors] generally is not good for us," one cable-network affiliate sales chief said. "And 16 million subscribers puts [EchoStar] in a different league than before."

Added a cable veteran: "That's an incredible concentration of power. They would become the 800-pound gorilla. And EchoStar has been notably tough already in its programming negotiations. Charlie is a fighter."

Ergen last week figured that his $25.8 billion purchase of Hughes Electronics Corp. — and its DirecTV direct-broadcast satellite division — should generate a variety of cost-saving synergies by 2005, including $600 million to $700 million in reduced programming costs. That's largely because the combined DirecTV-EchoStar operation can demand big volume discounts from cable networks. EchoStar has 6.4million for its Dish Network-branded DBS service; DirecTV has 10.3 million. By the time the deal closes, those numbers could combine to more than 20 million homes.

"There's going to be some revenue hits to programmers," the affiliate-sales chief said. Added another top cable programming official: "Charlie is going to be a very tough guy to deal with, with 16 million subscribers."

Cable networks that don't bow to Ergen's demands during contract negotiations may be in for a rude awakening.

"I think you're going to see some programming services dropped," another affiliate-sales chief said. "Ergen's tough."

Notably, Ergen has played hardball with Fox Family Channel. In September 2000, EchoStar filed suit against the programmer, seeking to terminate carriage because of the network's change in ownership.

Ergen also told reporters that EchoStar's $500,000-a-month deal to carry Fox Family should be voided and that the DBS provider should pay less, since the channel's ratings had dropped substantially. That suit is still pending.

If Ergen's acquisition does gain regulatory approval, industry insiders predicted that EchoStar vice president of programming Michael Schwimmer would survive as the top programmer, and not DirecTV senior vice president of programming acquisitions Michael Thornton.

IMPACT ON SMALL MSOS

Schwimmer was described as "a corporate soldier for Charlie." One affiliate-sales chief said: "People believe in Charlie and will go through walls for him. They can be pretty mercenary."

Distributors are worried about the repercussions should Ergen prove able to extract substantial volume discounts on programming costs from cable networks. Programmers will have to make up that lost revenue from somewhere else — specifically from MSOs — said American Cable Association president Matt Polka, whose trade group represents small cable operators that are particularly vulnerable.

"It may be unprecedented, the kind of discounts Ergen will be able to force," Polka said. "Networks will have to make up the difference. And where will that difference come from?"

Polka and cable-network officials also noted that Ergen has aggressively waged battles on behalf of DBS — and against programmers — on various issues related to program access and must-carry.

"He continues to try to get out of must-carry with lawsuits," Polka said. "He wants free rein without government oversight."

Mike Pandzik, president of the National Cable Television Cooperative, said the combined DBS platform would "serve a gatekeeper role the size of which we've never seen before."

'SUNDAY TICKET' QUESTION

One nagging question stemming from Ergen's deal is whether or not the National Football League will renew DirecTV's "NFL Sunday Ticket" out-of-market pay-per-view package when it expires in 2002 — and thus whether Ergen would have it to drive distribution for his merged EchoStar-DirecTV outfit.

"The NFL has helped put DirecTV on the map," said The Carmel Group subscription-TV analyst Jimmy Schaeffler. "The NFL may decide that because of money, they will make this package available to cable operators as well as DBS, or take it away from satellite subscribers."

NFL officials couldn't be reached for comment last week. EchoStar said it would review those programming deals now in place with DirecTV.

"We don't have any details on whether we'll be able to get NFL Sunday Ticket and those types of things," EchoStar communications manager Marc Lumpkin said. "Certainly, we'd like to have them, but we have to wait and look over all the contracts and evaluate all those things over the next nine to 12 months."

Despite fears and misgivings about Ergen, several programmers said they feel more comfortable with him as owner of DirecTV, rather than Rupert Murdoch's News Corp. That's because Ergen is strictly bottom-line oriented, with no apparent desire to get in the content business, they said.

These programmers feared that News Corp. planned to turn DirecTV into a distribution platform for its fledgling networks and new channels — to their detriment.

"Murdoch would have used DirecTV to leverage and benefit his own networks," one cable-network chief said. "But Charlie is content-neutral. There will be a level playing field for everyone."

Cable One Inc. vice president of programming and strategic marketing Jerry McKenna had his own worries about Murdoch ever getting hold of DirecTV.

Murdoch could have packed all his networks onto DirecTV. That would have placed MSOs under competitive pressure to pay any license-fee increases News Corp. might levy, since cable operators would be under pressure to offer the same services as DBS, according to McKenna.

But cable does have to worry about Ergen putting his skills as an aggressive marketer to work for a mega-DBS provider, McKenna said.

Mike Farrell contributed to this story.

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