Will Dish Network Dare to Drop ESPN? (Analysis)

Mushroom Cloud Charlie Ergen - H 2013
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Mushroom Cloud Charlie Ergen - H 2013

As tense talks head toward a Sept. 30 deadline, big questions remain about the cost of sports programming.

Charlie Ergen wouldn't use the nuclear option, would he?

The Dish Network CEO is threatening to drop Disney-owned sports powerhouse ESPN from his satellite service because of its high cost. The possibility that the fourth-largest carrier could go without a key network is at the center of negotiations this week in Denver as the clock ticks toward a Sept. 30 deadline when the current Dish Network-Disney/ABC contract expires.

Fueling speculation, a Wall Street fund manager tweeted this week that negotiations between Dish and Disney aren' t going well and there likely will be a blackout similar to Time Warner Cable's recent standoff with CBS.

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Reps for Disney and Dish declined to comment on the tweet but sources close to the talks insist that dire predictions are premature. Complex carriage talks frequently go down to the wire.

"Disney has been a good partner with Dish for a long time," a Dish spokesperson said in a statement. "We have been talking on a regular basis, with Dish's number one priority to reach a deal with Disney that makes sense for our customers."

Dish, which serves about 14 million subscribers, has a history of aggressive stances in carriage negotiations. In an August earnings call, Ergen said he knows Disney is looking for steep increases in fees per subscriber for its networks but he isn' t willing to ante up to keep ESPN on his service.

"Disney is not going to go out of business without the Dish Network and vice versa," Ergen said. He said it might be time for a cable or satellite distributor to take a long-term view "that sports isn't something they have to have."

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Instead, suggested Ergen, it might be better to offer customers a lower price. "While they'll lose customers initially," said Ergen, "they will gain customers long term -- they'll be back in a growth pattern for gaining customers."

Most analysts believe Dish and Disney eventually will reach a deal. But SNL Kagan's Robin Flynn points out that even if Dish drops ESPN, the service will still carry lots of other sports. She said Ergen could turn the loss of ESPN into a positive for customers. "Dish is already the lower-cost provider," said Flynn. "They could play that up."

Amy Yong, an analyst with Macquarie Securities, said Dish also could take a tough stand because losing ESPN probably won' t have much impact on its stock price. That's because "the driver" of Dish' s shares is now what happens with its spectrum assets and wireless rather than its video offerings.

"The real hard-core sports fans are already over at DirecTV," adds Yong, "not at Dish."

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Derek Baine, analyst at SNL Kagan, notes that sports make up 40 percent of Dish's program costs but attract only 20 percent of the viewers.

For that reason, some experts say that pressure to air football on ESPN won't force a deal, as was the case with the CBS-TWC standoff, which ended just as the football season was about to begin. Dish would still carry the NFL packages from CBS and Fox.

Ergen hasn't been afraid to cut networks in the past. Since 2010, Dish has dropped for at least a short time Fox cable networks, MTV, AMC, Raycom and Sinclair stations. Dish does not carry New York-area sports networks MSG and YES because it considers them too expensive.

Even as talks with Disney continue, Dish also is in heated negotiations with Media General, whose 17-station contract also end Sept. 30. Dish has asked to extend the deadline until Media General is taken over by Young Broadcasting, which does have a deal with Dish, but the TV stations operator had declined as of Wednesday.

Media General said Dish refuses to pay a fair price for its content. Dish fired back in a statement this week that the Media General situation is proof that Congress or the FCC needs to act to stem blackouts or even to roll back broadcasters' right to seek retransmission payments.

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"Media General' s threats against customers in its markets confirm the need for retransmission consent reform," said Dave Shull, Dish executive vp and chief commercial officer. "Broadcasters like Media General put profits ahead of the public they are supposed to serve. It is ironic that Media General is threatening its customers as Dish recently sat before Congress to discuss meaningful retransmission consent reform."

Another behind-the-scenes reason for tension between the two companies is an ongoing legal battle over Dish' s Hopper and other features that make it easy for viewers to skip commercials. Disney's ABC and other networks see this as a huge problem at a time when DVR users often skip commercials.

On Wednesday, U.S. District Court Judge Laura Swain in New York ruled against ABC in its efforts to stop Dish subscribers from using its PrimeTime Anytime and AutoHop features.

Aside from the legal fight, the talks are complicated. Disney is reportedly looking to raise the cost for ESPN to as much as $8 from the approximately $5.50 per subscriber per month under the existing contract. The discussions encompass more than 70 channels, platforms and digital services (including VOD and versions of TV Everywhere).

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A Disney/ABC spokesperson said that while the talks concern all of its channels — including the eight local ABC stations nationwide, the Disney suite of children' s channels, cable channels including ABC Family, and the ESPN suite of channels — a deal could include some or all of them.

That means Dish could continue to carry ABC local channels — which reportedly currently cost less than 50 cents per subscriber per month — as well as Disney and other cable channels, while dropping ESPN.

Some on Wall Street call this the "nuclear option."

Still, there is skepticism over whether that will ever happen.

"Charlie is a tough negotiator, but he' s not crazy," said market analyst Craig Moffett. "He may be willing to take a blackout, but the ‘nuclear option' isn' t realistic. Permanently dropping ESPN would be very hard to swallow but permanently losing ESPN and ABC and the Disney Channel all at the same time would be impossible."

However, a blackout is still possible. "I can see an extended battle like we just had with CBS and TWC," said SNL Kagan' s Baine.