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Deal of a Lifetime

Big payoff to station group lurks behind EchoStar-Lifetime fight 1/13/2006 07:00:00 PM Eastern

Lifetime Television’s bitter fight with EchoStar Communications, which refused to carry the channel, has spilled out into full-page ads, articles and cable conversation everywhere.

EchoStar’s “unwillingness to restore Lifetime and Lifetime Movie Network to the air and to continue working toward an agreement” shows that EchoStar founder Charlie Ergen does not “have women’s best interests in mind,” says one ad.

But the “Drop DISH” campaign is not the most interesting part of the dispute. The best reading is a routine federal filing by station group Hearst-Argyle Television, whose controlling shareholder Hearst Corp. also owns 50% of Lifetime (The Walt Disney Co. owns the other half).

The disclosure was slender, just five sentences long, but it blasts volumes about one of the most divisive issues in the TV business: retransmission consent. And it should have media giants with TV stations rethinking the way they handle their own negotiations with cable operators. Hundreds of millions of dollars are at stake.

The revelation: Hearst-Argyle has secured a surprisingly lucrative deal with DBS operator EchoStar. In exchange for the right to retransmit the signals of the broadcaster’s TV stations in local markets, EchoStar has agreed to pay Hearst-Argyle around 50¢ per subscriber monthly to carry its stations. Stand-alone station groups will cheer. Many have already been collecting retransmission-consent fees from EchoStar and DirecTV, but the rate has been more like 15¢-20¢ monthly.

First, some background: EchoStar dropped Lifetime and Lifetime Movie Network from its 12 million- subscriber Dish Network on New Year’s Eve, unwilling to pay Lifetime’s license-fee hike. For years, Hearst-Argyle and other big TV broadcasters have used cable operators’ desire to retransmit local stations primarily to bolster their cable networks. Stations would prefer to receive cash for the most popular programming on television. But cable systems have largely refused to pay straight license fees for programming that anyone can use a $2 antenna to get for free.

Instead, operators often agree to buy advertising on a station, so the system receives something in return. What’s pertinent here is that they’ll also agree to pay a slightly higher fee for a cable network the broadcaster owns or invests in. This annoys most station execs, but the game helped birth Fox’s FX and Scripps Howard’s Food Network. NBC O&Os’ retransmission-consent rights help NBC Cable get better rates for USA Network and Sci Fi Channel.

Hearst-Argyle used its retransmission-consent clout to help corporate cousin Lifetime. Hearst-Argyle uses the women-targeted basic network as its “agent” in negotiations with cable and DBS operators serving around 14 million subscribers. Lifetime can use the clout of Hearst’s 28 stations to secure greater rates and carriage for its networks.

Lifetime then compensates Hearst- Argyle for the value it generates from those rights. Hearst has to be fair to Hearst-Argyle’s public shareholders, after all. In 2004, the company says, it received $1.8 million under the deal. For the first nine months of ’05, Hearst-Argyle collected $5 million. I figure the higher number comes to around 4¢ monthly for each cable or DBS subscriber in the broadcaster’s markets like Boston, Pittsburgh, and Orlando and Tampa, Fla.

The bombshell: Just as Lifetime’s deadline with Echo­Star neared, Hearst- Argyle broke ranks. The broadcaster accepted EchoStar’s offer of $11 million a year for retransmission consent, or what it described in the SEC filing as a payment “less than 1.5% of its expected 2006 revenues.”

That’s an enormous jump. EchoStar has about 1.8 million subscribers in Hearst-Argyle markets. That’s 50¢ per subscriber; it’s more than 10 times what Hearst-Argyle collects from Lifetime. Assuming Lifetime has been paying Hearst-Argyle fair value (auditors ensure it does, or shareholder lawyers will fill the breach), breaking free of the cable group is a heck of deal.

Why did EchoStar pay so much? Partly to rob Lifetime of a strong weapon.

EchoStar Chairman Ergen stands willing to resist whatever pressure from women’s groups that Lifetime is able to rally. It’s easy to see a cable or DBS operator facing a storm from irate customers and politicians who suddenly lost ESPN, Fox News or Nickelodeon. Ergen took MTV and Nick dark in 2004 but restored them in 24 hours after subscribers screamed at EchoStar. How many EchoStar subscribers might cancel service because Lifetime has gone dark?

Losing network affiliates with strong local newscasts, however, could result in quick outcry and subscriber defections. Even Cox Communications saw that in its nine-month-long dispute with Nexstar Broadcasting.

Coping with Hearst-Argyle separately could turn out to be pretty cheap. If Ergen can lower his future Lifetime bill by an average of 8¢ per subscriber monthly, his Hearst-Argyle deal breaks even. Lifetime and EchoStar will eventually settle. The question for broadcasters is whether Ergen has set a precedent.

One big test will be CBS. When it was part of Viacom, CBS’ stations group handed its retransmission- consent rights over to MTV Networks to secure carriage of cable startups like Nicktoons and VH1 Classic.

Now that Viacom has split, CBS must go it alone, and CEO Leslie Moonves has declared repeatedly that he wants cash from cable operators.

Given the new precedent set by EchoStar and Hearst-Argyle, station owners may be wondering if it’s worth the gamble to go dark in a market waiting for a higher price. They face only one question: Do I feel lucky?

E-mail comments to jhiggins@reedbusiness.com

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