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Dish-ESPN Trial Offers a Rare Inside Look at TV Dealmaking

The satellite provider seeks $150 million from the cable net as the current eight-year licensing deal is set to expire in September.

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ESPN

The licensing deal between ESPN and Dish Network is set to expire in September. The last time the two parties reached a carriage agreement was in 2005, when an eight-year deal was struck. That negotiation took more than a year to complete, and now, with about seven months left before a new deal is needed, the two sides are arguing in a New York courtroom over whether ESPN breached the terms of its 2005 deal.

If ESPN and Dish fail to reach a new agreement by about Sept. 20, Dish will no longer be able to carry on its system ESPN, ESPN2, ESPN News, ESPNU, ESPN Deportes and ESPN Classic.

And yet, Dish is content to engage in a bit of brinksmanship this month in a $150 million lawsuit, accusing ESPN of violating its last deal by allegedly giving other distributors such as Time Warner Cable and Verizon more favorable treatment on subscriber rates, allegedly giving other distributors like Comcast more favorable treatment on packaging rights and by allegedly allowing distributors to stream ESPN online to customers.

By now, most cable and satellite customers are familiar with the pains of blackouts when cable and satellite distributors fail to reach agreements with TV networks on licensing terms. What might be less appreciated is the extent to which the deal-work is complicated by an interwoven TV industry.

STORY: Trial Begins in Dish Network's $150 Million Lawsuit Against ESPN

One of the more common aspects of contracts between distributors and networks is something called an MFN, or most favored nation, provision. For example, it means that when ESPN makes a deal with DirecTV for better terms than what ESPN first gave Dish, ESPN is then obligated to equal the playing field. In reality, though, the situation becomes very complicated -- as has become clear in the Dish-ESPN trial.

For example, thanks to the 2005 ESPN-Dish agreement, Dish originally was set to pay Disney about 47 cents per subscriber per month this year for ESPN Deportes. That's on top of the more than $5 per subscriber per month that Dish now pays for ESPN. Dish's attorney Barry Ostrager pointed out that ESPN gets the "highest license fee" any satellite or cable distributor pays for any network. And in an obvious play for a jury's pocketbooks, he added, "At least $5 of every bill is attributable to ESPN."

Under its original agreement, Dish was obligated to pay a monthly subscriber fee of 35-47 cents for ESPN Deportes between 2007 and 2013 (the rate bumps up roughly 7 percent each year), but then in 2007, Time Warner Cable reached a deal for 8-18 cents for Deportes and Verizon got an even better deal at about 3 cents. (Spread across tens of millions of customers, the pennies add up.)

Thanks to Dish's MFN provisions, the satellite company was going to get a discount. The only questions, when and how?

To seed suspicion in the jury's minds that ESPN violated the spirit of the agreement, Ostrager asked a series of questions of Justin Connolly, senior vp national accounts at Disney Networks, who spent nearly 2 1/2 days on a witness stand.

Dish's questioning essentially created this storyline:

When it comes to meeting MFN obligations, ESPN's system is loose. It doesn't have anyone solely responsible for reviewing them. Instead, ESPN holds a monthly meeting where employees discuss if any MFN offers need to be extended to distributors. When ESPN signed its new deals with TWC and Verizon, it knew exactly how much less Dish would be paying for Deportes under similar contractual terms. An internal email from ESPN titled "Dish Economics" estimated that the impact of lower Deportes subscriber fees to be $2.8 million through 2013 in the NYC market and $7.6 million in other markets.

Nevertheless, ESPN attempted to work the obligation to its own advantage. One email from Connolly attempted to find a "much better way to finesse MFN." When Dish finally got the offer, it came with four different confusing options and various terms and conditions so as to obfuscate the benefit that Dish would be getting. Additionally, the offer came in March 2009, about 18 months after Dish signed its deal with TWC and long after Comcast had received its own MFN offer.

If there's one question that Ostrager repeated again and again, it was, "Can we agree that ESPN owed an MFN offer to Dish?"

That's at least Dish's story.

Connolly had answers for all of this.  

Dish's MFN provision was "unique" and "not straightforward," he said, requiring a lot of information from third-party distributors to arrive at proper calculations on what was owed to Dish. The "Dish Economics" email only served as estimations, and while it might have taken 18 months to extend the MFN offer, the value eventually applied "retroactively" so that Dish would receive benefit back to 2007. And it took Dish 11 months to come back and accept the offer.

The deals that TWC and Verizon got weren't exactly the same either, said Connolly. For instance, Verizon got a lower subscriber rate on Deportes by agreeing to extend its overall deal for one year, to bump up the rate increase on ESPN from 5 percent to 6 percent and by waiving an ESPN rate MFN. Thus, Connolly provided an explanation why Dish was given various options and why Dish ultimately favored the deal that TWC got rather than the one that Verizon got -- even if it meant paying more money.

The trial has featured other ways that Dish believes it has gotten the sharp end of the industry stick. Dish asserts that its cable competitors have been able to put lesser channels like ESPNU and ESPN Classic onto less distributed tiers of cable packages and have given Comcast the right to distribute a channel like ESPNU to bars and taverns on an a la carte basis. (On the first point, ESPN believes that Dish is misreading the contracts. On the second point, ESPN says Dish got the same offer.)

If there's anything particularly surprising about the trial thus far, it's the extent to which Dish is upset how ESPN is available online. This is particularly noteworthy given how in the past year, Dish has ferociously battled TV networks on consumers' rights to use its ad-skipping DVR product, AutoHop -- an aggressive posture that won plaudits in the tech community.

During negotiations for the ESPN-Dish agreement, the satcaster originally demanded that ESPN not allow any affiliates to stream the network online "for fee or otherwise."

Eventually, after some pushback from ESPN, the parties eventually arrived at contract language that said, "ESPN shall not distribute the ESPN Networks … via the Internet without imposing a subscription fee specifically for such distribution."

Dish contends that when customers of TWC or Verizon go online, authenticate themselves and then are able to freely access the "WatchESPN" online app, that's a breach of ESPN's obligation under the above contractual provision.

In response, Connolly pointed out that other distributors are paying to ESPN on average 19 cents more in subscriber rates as a result of having digital rights. And he says the contract only pertained to ESPN's own potential streaming -- "They didn't want us to go over the top [to customers] and cut them out," he said -- and not to the distributors' ability to stream to its own customers. "[The contract] doesn't mention Verizon to Time Warner Cable," he noted.

During the next week or so, the parties will continue to fight over their respective interpretation of contracts in the TV industry.

Meanwhile, the coming negotiations between ESPN and Dish over a new licensing agreement provide a dark shadow to what's happening in a courtroom. Judging by the trial, the negotiation figures to be quite contentious. No doubt the stakes are high. Across the country, TV viewers are finding their cable and satellite bills increasing exponentially. That is due in no small part to money paid for live sports. For example, by the end of the decade, Time Warner Cable will be paying nearly $8 for each of its roughly 13 million subscribers every month just to carry one network -- ESPN -- which is nearly twice as much as TWC paid just a couple of years ago.

Subscriber rates, packaging obligations and digital rights represent a billion-dollar issue -- even more than the estimated $150 million at stake in a New York courtroom this month.

In a statement, an ESPN spokesperson tells The Hollywood Reporter, "We are very pleased with the progress today and remain confident in our position."

E-mail: eriq.gardner@thr.com; Twitter: @eriqgardner