License To Bill
DBS companies go ballistic over sky-high costs
By John M. Higgins -- Broadcasting & Cable, 7/18/2004 8:00:00 PM
For all of cable operators' complaints about programming fees, their rivals at DirecTV and EchoStar are saddled with even higher costs—and are fighting to bring them in line.
| DBS at a Disadvantage | |||
|---|---|---|---|
| Old, expensive deals mean higher monthly programming fees for DirecTV and EchoStar | |||
| DirecTV* | EchoStar | Cable | |
| *Excludes NFL Sunday Ticket Source: Morgan Stanley's Richard Bilotti |
|||
| Video revenue per sub | $54.00 | $48.84 | $52.60 |
| Programming costs per sub | $23.86 | $21.03 | $17.58 |
| Cost as a share of revenue | 44% | 43% | 33% |
Executives at the direct-broadcast satellite (DBS) companies express frustration that they face substantially higher license fees for many "cable" networks than cable operators do. That's true, even though the 12 million-subscriber DirecTV serves more customers than any cable operator except Comcast. Even EchoStar, with 8 million subscribers, outranks operators Cox and Charter.
License fees are a sensitive topic, and network executives weren't willing to speak publicly about their deals. But Morgan Stanley media analyst Richard Bilotti estimates that programming costs eat up 43%-44% of DirecTV's and EchoStar's revenues. That's about 10 percentage points higher than a cable operator pays out: an annual bill of more than $4 billion for DirecTV and $2.5 billion for EchoStar.
Satellite operators face all the same problems that cable operators do, such as the escalating cost of ESPN and other sports networks. But DirecTV and EchoStar costs are compounded by the legacy of contracts that were signed with some networks in the early days of the DBS industry and serve as the base for renewed deals now.
Networks have already seen tough fights, particularly with EchoStar, and there's no sign that renewals are going to get any easier.
"We signed a lot of deals when we had no subscribers," EchoStar Chairman Charlie Ergen said in a recent investor conference call. "We're the fastest-growing now, and we need to be treated fairly by the programmers. Those deals come up, we have to get a fair deal, or we can be without some channels. That's just the way it's going to be."
Cable's preferential treatment underlies the tense negotiations between networks and DBS companies in recent months. EchoStar went to war with Viacom over costs in February, taking the most extreme move of dropping all of Viacom's MTV Networks. Subscriber outrage forced EchoStar to quickly restore the service.
But that didn't dissuade Ergen from threatening to use the same weapon during down-to-the-wire negotiations with Turner Broadcasting in May.
The pressure from DBS companies threatens to crush NBC Universal's pop-culture network Trio. About 12 million of the cult network's 18 million subscribers are on DirecTV, which no longer wants to pay a license fee for the critically lauded but thinly viewed channel. Some NBC executives question whether Trio is worth the wrestling match, if it means sacrificing better terms for USA Network or NBC's news networks.
One reason for the high tab is that DBS services offer more channels in their basic tiers than most cable systems. But a bigger reason lies in the history of the satellite business. When DirecTV and EchoStar were starting up a decade ago, they were starved for programming and had no subscriber base to use as leverage.
DBS companies agreed to pay license fees that were far higher than what cable operators paid. Viacom was the first major programmer to sign a DBS deal, cutting a carriage agreement with USSB (now part of DirecTV). The reason for Viacom's eagerness soon became clear: SEC filings show that USSB had agreed to pay as much as 40% more than cable operators for Viacom's MTV- and Showtime-related networks.
"The people who did the original deals had to do what you had to do to get those businesses started," says DirecTV Executive Vice President of Programming Stephanie Campbell.
Federal laws mandate that cable networks owned in part by cable operators must offer satellite companies the same terms offered to their own cable systems. That applies to the likes of HBO, CNN, Discovery Channel and E!. But networks owned by broadcasters NBC, Disney, Scripps and DirecTV part owner Fox are immune.
Cable networks owned by broadcasters have extra leverage, since DirecTV and EchoStar also need rights to retransmit the signals of their local broadcast stations. So those networks are "not going to take a huge haircut; they don't have to," says the head of affiliate sales for another cable programmer.
DirecTV's Campbell says that "it's safe to say that we have made progress over the years" but DirecTV still wants better deals. "When we distribute something, we distribute nationally, as opposed to a cable operator, who's in just a few markets," she says. "We should get extra points."
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