The Blackout Backfired

Viacom gets five-year deal; EchoStar must carry Nicktoons

When Mark Rosenthal answered the phone March 10, the MTV Networks president heard a woman on the edge. "Listen to this, listen to this," she insisted, obviously thrusting the receiver toward her screaming children. She was a Dish Network subscriber, heavily dependent on SpongeBob SquarePants
to pacify the kids.

That was the kind of anger provoked when EchoStar Communications' Dish Network dropped Viacom's CBS O&O broadcast stations and basic-cable channels, including MTV, Comedy Central, and SpongeBob's home, Nickelodeon.

The dispute over license fees and carriage of a new network darkened the basic-cable networks nationwide for EchoStar's 9.5 million subscribers. (Some 1.6 million of them were in markets where Viacom owns CBS and UPN stations.) CBS affiliates in other markets and pay network Showtime were not affected.

Thousands of DBS subscribers jammed the phone lines of Viacom and EchoStar to protest. Naturally, both companies say that, once they explained the situation, the callers were supportive. Tell that to the kids.

It's easy to see where most of the anger was directed. EchoStar CEO Charlie Ergen folded within 24 hours and put everything back on the air. According to Merrill Lynch media analyst Jessica Reif Cohen, Viacom got a five-year deal guaranteeing an annual increase of 7%-8%. That includes EchoStar's agreement to launch startup channel Nicktoons.

The irony is that Ergen had fiercely fought adding Nicktoons. He preferred separate deals for the networks and the stations. He also demanded a much lower rate. "I don't think we got as good a deal as we wanted," he says, "but we got a deal that was good enough."

"Good enough" is code for a blackout that sent Viacom executives into a frenzy. EchoStar already has a telemarketing operation handling some 100,000 calls daily, so it was better prepared to handle the flood of complaints. Still, recordings offered Dish subscribers the number for Viacom's switchboard and, for a while, President Mel Karmazin's apartment.

Viacom quickly commandeered its IT help desk to handle the flood, then ran phone lines into two conference rooms and part of the company cafeteria. Random Viacom staffers manned the phones. Rosenthal even did a stint of damage control alongside Nickelodeon President Herb Scannel and Nickelodeon COO Jeff Dunn.

Although viewers were instantly moved to action, advertisers were a little slower to anger, inquiring about the situation but not immediately canceling commercials. For CBS, the blackout covered around 1% of its distribution. For the cable networks, the threat was more severe, with the DBS service accounting for around 12%.

EchoStar faces little risk of immediate customer losses, since most of its subscribers have yearlong contracts. Ergen tried to position himself as their protector against greedy networks. As many cable operators in a similar position know only too well, though, subscribers blame the company they pay to deliver the programs they watch.

"It never should have come to this," Rosenthal says. "The consumer spoke. The consumer spoke loudly." Some, we'd guess, even cried and stamped their feet and wouldn't eat their dinner.