EchoStar Pulls Plug on Viacom in Bitter Fight

Millions of Dish Network satellite TV customers from Los Angeles to New York woke up Tuesday to find they were victims of a bitter contract dispute between two of the nation’s largest media companies, and unable to tune in to CBS, MTV, Nickelodeon and a handful of other channels.

The blackout occurred after EchoStar Communications Inc., the nation’s second largest satellite TV provider, and Viacom Inc., owner of CBS, Black Entertainment Television and the MTV Networks, failed to reach an agreement to renew their distribution contract.

As a result, an estimated 1.6 million Dish customers were left without their local CBS television station in 16 cities nationwide, including Los Angeles. About 10 million customers across the country were stripped of 10 other Viacom channels, including Comedy Central, TV Land and VH1.

The turn of events caught many analysts and consumer advocates by surprise. They had expected a quick resolution of the contract dispute because of the potential for political, financial and consumer backlash.

“When it comes down to it, this is about how two companies divide up the money,” said consumer advocate Andrew Schwartzman of the Media Access Project. “Nobody thinks it will last that long.”

During a live broadcast Tuesday on the Dish Network of “Charlie Chat,” a call-in program in which EchoStar co-founder Charles Ergen answers subscriber questions, the media mogul said the two companies were back at the bargaining table trying to hammer out a deal.

In the interim, EchoStar has agreed to give Dish customers a credit of as much as $2 a month to compensate for lost service.

For Viacom, the stalemate threatens to reduce CBS’ ratings and its advertising revenue just eight days before one of its biggest events of the year, “March Madness,” the fervently watched NCAA basketball tournament.Viewers learned of the dispute over the weekend when Viacom ran a “crawl” across its telecasts warning all customers, not just those affected, that Dish subscribers could lose its programming. The crawl included an EchoStar phone number viewers could call to complain. People who called the number heard a recording suggesting they call Viacom.

One of the phone numbers provided was for Viacom President Mel Karmazin’s home. Sources say Karmazin received more than 1,000 calls before disconnecting the line. Viacom executives were furious, the sources say.

An EchoStar spokesman said the referral to Karmazin’s home number was “inadvertent” and quickly corrected.

According to Viacom, the rate increases it is seeking from EchoStar amount to 6 cents a month per subscriber and that other pay TV companies, including DirecTV, Comcast Corp. and Time Warner Inc., have agreed to similar increases under new contracts. EchoStar disputes Viacom’s numbers, saying the increase amounts to 40% over the life of the contract.

Neither company would disclose specific terms in dispute.

CBS said it doubted that ratings would be hurt by the blackout because the 1.6 million viewers are such a tiny fraction of the 100 million TV households it reaches nationwide. In addition, it said it was urging customers to dust off the old antennas used to pull down over-the-air broadcast signals before the days of satellite and cable TV.

At the same time, many Dish customers were considering switching to cable rather than miss popular Viacom shows such as “Survivor” and “CSI” on CBS, “SpongeBob SquarePants” on Nickelodeon and “The Daily Show” on Comedy Central.

Said one Dish subscriber who called in to “Charlie Chat” identifying himself only as Mike: “This is going to give Dish a black eye.”

EchoStar’s pay TV rivals were licking their chops, looking to sign up disenfranchised Dish customers. In Los Angeles, the five local cable TV providers set up a toll-free hotline, 800-800-CABLE, promising immediate or next-day installation. Several cable companies have been offering to credit customers $400 over a one-year period to trade their satellite dish for a cable box.

Although pay TV distributors such as EchoStar often threaten to drop a service to gain leverage at the bargaining table, few follow through.

EchoStar has been at war with Viacom since the Dec. 31 expiration date of their contract.

Ergen said he was risking customer defections to keep a lid on programming costs that drive up rates and to prevent Viacom from forcing his company to carry “obscure” channels.

EchoStar filed an antitrust lawsuit against Viacom in January, claiming that the programmer was illegally forcing the pay TV provider to carry channels it did not want in exchange for the rights to the popular CBS signal.

“It’s like the bully in a schoolyard who has taken the lunch money,” Ergen said during “Charlie Chat.” “It’s using CBS to extort the lunch money.”

The practice, known as “bundling,” has been widely used by major broadcast networks to get cable and satellite distributors to carry their cable channels. Viacom says this is allowed under a “retransmission consent” law passed by Congress in 1992.

The pay television industry has argued for years that these retransmission consent rules have contributed to the rising pay TV prices by giving broadcasters advantages in negotiating with cable and satellite providers that other programmers don’t have.

“The retransmission consent law is highly corrupt,” said consumer advocate Jeffrey Chester of the Center for Digital Democracy. “It has engendered fierce combat among the handful of media giants, shutting out independent programmers that don’t have the power of a broadcaster behind them.”

Many on Wall Street expect EchoStar to be forced to merge or sell out to one of these giants because it lacks the clout to go toe-to-toe with these giants.

Viacom has been viewed as a potential acquirer of EchoStar because it lacks a pay TV distributor. At an investor conference this week, Viacom chief Sumner Redstone said he was not interested in EchoStar but could envision acquiring a rival cable TV provider.

The last major programming blackout was in 2000, when Time Warner Cable dropped Walt Disney Co.’s ABC in a contract dispute. The Federal Communications Commission stepped in ordering Time Warner to reinstate the broadcast network, and later fined the cable provider.

Some Washington sources, however, doubted the EchoStar situation would prompt as much political backlash as the Time Warner debacle because of the dominance of cable, which controls 75% of pay TV customers. EchoStar serves less than 10%.

Still, some warn that the tactic could backfire.

“Charlie may enjoy playing hardball, but when one of the giants pulls the plug on programming, it only brings on the wrath of the regulators,” Chester said.

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All or nothing

EchoStar’s contract dispute with Viacom highlights the way that media conglomerates have used their cable properties as leverage in negotiations with satellite and cable distributors. A look at some of the channels that can be put on -- or taken off -- the negotiating table.

Viacom:

CBS MTV channels VH1 UPN Comedy Central Spike TV BET TVLand Nickelodeon channels

Walt Disney Co.:

ABC Disney Channel Family Channel ESPN channels SoapNet Toon Disney

General Electric:

NBC CNBC MSNBC Bravo Telemundo USA* Sci Fi* Trio*

News Corp.:

Fox News FX Regional Sports Networks Fuel National Geographic The Speed Channel

*Once GE completes its deal to purchase Vivendi Universal’s entertainment assets. Source: Company reports