Broadband Cable Association of Pennsylvania

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March 6, 2014

In the race to deliver television over the Internet, Charlie Ergen's Dish Network Corp. is pulling ahead.

With a groundbreaking agreement this week with Walt Disney Co., the satellite-TV company is poised to be the first to offer an Internet-based competitor to cable TV, a new kind of business that other major companies such as Intel Corp. and Apple Inc. have tried - and so far failed - to deliver. The deal gave Dish the rights to carry the Disney Channel, ABC and ESPN online in a service known as over-the-top, or OTT, because it runs over an Internet connection. In exchange, Ergen agreed to put limits on Dish's ad-skipping technology. Dish now plans to negotiate with other major cable networks, offering similar terms to get online rights. "Every deal is different, but certainly there are parameters we agreed to that will help us define how we approach the OTT business," said Dave Shull, Dish's chief commercial officer, in an interview. "Disney-ESPN content has a great deal of appeal and is a core of what we want to offer on the OTT side. They moved first and we will build around that."

An Internet-based TV package would give consumers a new option beyond cable, satellite and phone companies to get access to their favorite channels. For Dish, it would be a way to gain new subscribers at a fraction of the cost, since online delivery doesn't require as much physical equipment. It also gives Dish a potentially bigger market since it would no longer be limited to consumers who are willing or allowed to mount satellite dishes on their homes. Dish is working on price and packaging, and it's too early to speculate on when it might introduce the service, Shull said. The company aims to offer the service as soon as it can get enough programming deals in place, and is considering charging $20 to $30 a month, said people with knowledge of the matter who asked not to be identified because the plans are private. "We think there is a group of individuals, 18-to-34-year-olds, who would love to have a lower-cost product with some of the top content out there," Shull said. "That's who we'll be targeting." The Disney agreement would let Dish offer a personalized subscription service charging for each individual viewer in a family, a significant change to the current cable-TV model based on one monthly fee for the entire household, said Rich Greenfield, an analyst with BTIG LLC, said on Bloomberg Television today. "We are talking about moving from a household subscription," Greenfield said.

The promise of Web-delivered TV has spurred a long line of potential competitors to seek the rights from cable channels that Dish just won from Disney. No one else has come as close as Ergen. Sony Corp. reached a preliminary agreement in August to stream Viacom Inc.'s programming, a person with knowledge of the matter said at the time. Intel sunk more than $500 million into a TV-streaming service before scuttling the program and selling its technology to Verizon Communications Inc., which is considering its own online offering. Apple has been unable to persuade cable networks to let it sell their channels a la carte instead of bundling them together.

Ergen sealed his deal with Disney by using technology that threatened its advertising revenue. Dish's AutoHop service lets users skip commercials, and Disney was one of several TV programmers that went to court to stop it. In their deal, Dish agreed to disable AutoHop for Disney programs for three days after their air date, and the parties said they would drop litigation over the matter. "This is just further proof that Charlie is a master negotiator," said Amy Yong, a New York-based analyst at Macquarie Group Ltd. "They didn't just drop the litigation, they also gave him more distribution rights." Ergen is looking to take the same AutoHop terms to other major programmers to get streaming rights.

The first step may be to reach an accord with NBCUniversal, owned by rival Comcast Corp. Because of a regulatory agreement, the network has to offer Internet rights to anyone who has already secured such a deal with another major programmer. The requirement was part of the consent decree for Comcast's purchase of NBCUniversal. "We are looking at our relationship with NBC, which is very good, and looking at other deal parameters," Dish's Shull said. "I'm not sure we know who is next." Cameron Blanchard, a spokeswoman for NBCUniversal, declined to comment.

Dish wants to broker deals with other major cable channels before it starts selling a live-TV streaming service, Shull said. In negotiations, cable networks have required potential OTT providers to have multiple agreements with TV programmers in place before they can start selling the service, according to people who have been involved in such discussions. Channel owners don't want to be sold via the Internet on their own, the people said.

Cable-network owners have also insisted that OTT providers offer the same package of channels that cable and satellite services do - a condition that Dish agreed to in its deal with Disney. As an example, Dish can't sell only ESPN or only the Disney Channel, according to the people. "Disney won't allow Dish to create a 'Disney-only' service," said Todd Juenger, an analyst at Sanford C. Bernstein & Co., in a research note yesterday. "We suspect Disney's requirements make it such that the offering would be closer to a full bundle than a skinnied-down package." Dish was one of the first companies to look at the possibility of selling TV over the Internet and had been talking to programmers like Viacom as early as 2012. Dish already has an Internet-streaming service, Dish World, with live programming in countries outside the U.S. The savings are attractive for Dish. Selling TV over the Internet doesn't require the expense of installing dishes on rooftops, which cost Dish an average of $866 for each subscriber it acquired last year. Getting customers online could cost as little as $100 a year on average, according to one TV executive with direct knowledge of these discussions.

Finding a way to deliver online TV over high-speed connections remains a challenge for Dish, since it could find itself relying on competitors like Comcast, one of the nation's biggest providers of home Internet service. Dish has sought partners, such as Sprint Corp., to offer wireless Internet service for video delivery. Verizon, armed with the online-video technology it acquired from Intel, is also considering a national online-TV service over its mobile-phone network or its landline Internet network. "Over-the-top is coming," Chief Executive Officer Lowell McAdam said yesterday. "Our goal is to work with the content providers. I've personally had discussion with the CEOs of the large content companies."

If Dish goes ahead with an online service, competitors could follow - including cable companies like Comcast and Cablevision Systems Corp., which could move out of their traditional regions to offer TV nationwide, said Bernard Gershon, a digital media consultant in New York. "This potentially could start a battle with other operators," Gershon said. "If Dish gets similar rights from other programmers, this will be a groundbreaking event." Bloomberg

Netflix CEO Reed Hastings refuses to be a victim of highway robbery - even the online sort.

Little more than a week after the maker of the hit political drama "House of Cards" agreed to pay Comcast for direct access to its high-speed pipes, the company's chief financial officer said Netflix would not pay through the nose in its dealings with Internet service providers. "I would say that we still philosophically believe that the consumer is still best served in an environment where a content provider like ourself doesn't pay an ISP," Netflix CFO David Wells told attendees this week at the Morgan Stanley's media and tech conference in San Francisco.

Given the current climate - in which ISPs increasingly want providers of heavy-data flow, like Netflix, to pay up or risk having their stream get bogged down in traffic - Wells said that Netflix is willing to fork over cash for service, but that ISPs shouldn't look at it as a piggy bank. "We're not going to be interested in doing something that's going to meaningfully change the economics for us," Wells said. "But we are interested in doing things that, for the right set of economics, improve that subscriber experience long-term." Netflix cut a multiyear deal with Comcast last month amid concerns that the cable giants' customers were getting spotty Netflix service.

Previously, Netflix had been accessing Comcast's pipes through content-delivery middlemen, rather than directly. Wells called the deal with Comcast "incremental" and said it wouldn't impact the company's costs over sales. Verizon is also reportedly asking Netflix to pay up for direct access to its roadways amid concerns of similarly spotty streaming to Verizon's customers. In January, Netflix ranked Verizon the slowest out of 17 ISPs. Netflix shares rose 2.1 percent on Tuesday to close at $454.98. New York Post

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