EchoStar Communications [DISH] showed last week it is willing to risk the loss of subscribers to protect its low-cost advantage against other multi-channel video providers.

By refusing to accept what its Chairman and CEO Charlie Ergen described as “extortion”-type demands by Viacom [VIA] on Tuesday, the U.S. satellite TV services provider was able to negotiate a settlement with the mammoth programmer. At issue were the programming fees EchoStar would pay to carry the programmer’s owned-and- operated CBS affiliates in 16 major markets as well as 10 cable channels.

The unwillingness of EchoStar to cave in to Viacom’s initial demands led to a two-day turnoff of the programmer’s signals for the satellite TV service’s customers. Ergen defended his decision to his subscribers Tuesday evening when he fielded a mixture of supportive and angry calls and e-mails during a special “Charlie Chat” television call-in program to address the lost signals.

EchoStar is not alone in its dislike of the aggressive negotiating tactics and pricing of powerhouse programmers. The satellite-TV service is merely the most recent multi- channel video service provider that has howled about programming fee rate hikes sought by giant media companies.

With the popular NCAA men’s college basketball tournament scheduled to be carried by CBS starting next Thursday, pressure mounted for both sides to find acceptable terms to stave off what most likely would have been an incredible wave of complaints directed toward lawmakers and the Federal Communications Commission (FCC). A hearing before the House Energy and Commerce subcommittee on telecommunications and the Internet last Wednesday included testimony from Viacom about the Satellite Home Viewer Improvement Act (SHVIA) as well as calls from lawmakers for both companies to resolve the dispute before the start of the tournament. By the end of that night, an agreement between the two combatants had been reached.

The scheduled expiration of the SHVIA at year’s end is an important matter for broadcasters and satellite TV service providers alike. The law currently allows EchoStar and its chief rival, DirecTV, to provide local channels in local markets across the country, if the service providers negotiate retransmission rights with the broadcasting companies.

Although EchoStar ran the danger last week of losing some of the 1.6 million subscribers it serves in the 16 markets where Viacom owns the CBS affiliates, the programmer faced political risks if lawmakers and possibly the FCC begin to question whether it wields too much market power.

Aside from temporarily losing the rights to carry the Viacom owned-and-operated CBS affiliates, EchoStar also last week needed to cease airing such popular Viacom cable channels as MTV, Nickelodeon, VH1 and BET.

“The adverse consequences are arithmetic for Viacom, because it will lose a certain amount of both affiliate fees and advertising revenue per day,” said Douglas Shapiro, a satellite and cable analyst with Banc of America Securities. The consequences on an extended impasse, however, would have been “geometric” for EchoStar, due to its risk of losing more subscribers as the Viacom programming remained unavailable, he explained. Shapiro correctly predicted a quick resolution, with EchoStar motivated financially and Viacom spurred politically.

Cost-focused EchoStar put Viacom under a glaring public spotlight last week when it rebuffed the programmer’s demand for hefty rate hikes, and the same fate could befall other programmers that try to play hardball with the feisty satellite TV operator. Amid concerns that media-ownership concentration is giving the companies too much market clout, programmers may begin to feel the need to ease off the throttle a little in fueling their revenue through lofty programming fee increases.

Lawmakers increasingly are starting to take notice, and last week’s public attention to Viacom only added to the scrutiny by onlookers.

EchoStar also has an ace it can play in the future by attempting to mobilize its close-to-9.5 million subscribers who have signed up for its service since the company’s start of operations in the mid-1990s. Those subscribers could be effective grassroots lobbyists if future disputes between the company and programmers drag out.

EchoStar, now one of the top five U.S. multi-channel service providers, claimed Viacom sought to boost its programming fees by four times the rate of inflation during the life of a multi-year deal both sides were negotiating. Among Viacom’s “strong-arm tactics,” EchoStar claimed, was a demand that EchoStar’s DISH Network carry Viacom-owned channels that offer “little or no measurable appeal” to viewers in exchange for the rights to carry the owned-and-operated CBS stations in 16 big markets.

Low-Cost Provider

As the multi-channel video market’s self-proclaimed low-cost provider, EchoStar caters to a price-conscious clientele that is not likely to absorb rate increases without a rise in churn. Indeed, EchoStar is in the unenviable position of risking churn in the short-term from angry subscribers who lost their signals or of possibly incurring more customer defections long-term if the company needs to pass along big rate hikes to price-sensitive customers who may reject multi-channel video services altogether.

“It [the dispute] is totally about saving our customers money,” said Steve Caulk, an EchoStar spokesman.

During last week’s special edition of “Charlie Chat,” Ergen specifically blasted Viacom for insisting EchoStar tie its carriage of CBS to “obscure channels” that would not appeal to the company’s subscribers. EchoStar should not be “extorted,” nor should its subscribers, he added.

Under one Viacom proposal, EchoStar would have been charged premiums of between 15 percent and 25 percent for programming, compared to costs assessed against a cable company, Ergen said.

Ergen changed the tenor of his comments Thursday, in the wake of the settlement with Viacom.

“This agreement with Viacom allows DISH Network to remain the lowest-cost, all-digital TV provider in the country,” Ergen said. “We understand that this has been a difficult few days for our customers, and we thank them for all the encouragement they have given us throughout. We also look forward to a long relationship with Viacom in which we can provide their quality channels to our viewers.”

Fighting Back

EchoStar also has fought back against other programmers during tough negotiations in the past.

A January 2002 dispute with Disney [DIS] involved EchoStar’s lack of interest in carrying such cable channels as ESPN Classic and ABC Family. EchoStar also sparred with Allbritton Communications about the fee for offering WJLA, the ABC affiliate in Washington, D.C., and a number of other local channels around the country.

“I expect this is probably not the last time the industry will have to go through these kinds of things,” Ergen said during a conference call with analysts and the media Thursday.

A growing group of cable companies also has refused to pay soaring programming costs, and they have accepted the temporary loss of signals to avoid agreeing to unacceptable terms from programmers.

Steve Effros, a Fairfax, Va.-based cable industry consultant who heads Effros Communications, said several high-profile cases exist of programming going dark on cable systems when a broadcaster withdrew retransmission consent upon expiration of a contract when the operator balked at the new terms demanded by the broadcaster.

Cox Communications [COX] previously threatened to pull ESPN channels from its lineup before an agreement was reached with Disney. Certain small cable systems have been prevented from carrying a local affiliate, at times, because of excessive fees, Effros said. Such disputes involving the retransmission of local signals have taken place in states ranging from Georgia on the East Coast to California on the West Coast, Effros said.

In California, one cable system did not carry a local affiliate for many months because of a “showdown,” he added. Disney and Time Warner [TWX] also have squared off in a prior programming dispute, Effros recalled.

A big difference with EchoStar is that it was able to sway a federal judge to grant a temporary restraining order between January and last week to allow the company to carry CBS programming in all 16 markets where Viacom owns the local affiliates. The court’s temporary stay suggests EchoStar may have merit when it claims that proposals requiring it to take undesirable channels for an opportunity to carry CBS could be improper, Effros said. Viacom’s tough negotiating stance of insisting upon “tie-ins” with other programming put EchoStar subscribers at risk for missing the Super Bowl last January until the federal judge intervened.

“This has long been a legal theory that did not fly because tie-ins are not illegal with new products, but now it can be argued that this type of programming is no longer new, and the tie-in is purely a result of market power,” Effros said. “The case is very important, and I hope Charlie pursues it.”

EchoStar has challenged Viacom in court on antitrust issues by noting that Viacom is leveraging its control of the public airwaves — acquired by Viacom for free. The court fight is ongoing.

Viacom officials last week accused EchoStar of exaggerating the extent of the proposed rate hike, and it took the unusual action of urging EchoStar viewers to drop the service in favor of another provider.

Those tactics led Ergen to tell his viewers during “Charlie Chat” that the situation was similar to a bully in the schoolyard “extorting your lunch money.”

Viacom issued a public statement after last week’s settlement that apologized to viewers for service interruption and the company expressed its interest in serving them through DISH Network “well into the future.”

EchoStar’s customers are particularly price-sensitive. In contrast to the high-end subscribers intentionally cultivated by El Segundo, Calif.-based DirecTV, EchoStar’s clientele would be expected to resist price hikes, and several of the company’s subscriber’s praised Ergen during “Charlie Chat” for fighting programmers to keep prices as low as possible.

Other EchoStar subscribers who participated in the chat cited Viacom’s public claim that the satellite-TV provider recently hiked its subscribers’ bills by as much as $3 a month but it refused to consider paying an additional six cents a month per subscriber for the right to carry Viacom’s channels. EchoStar officials countered that they would have taken such an offer from Viacom long ago if it had been presented. Instead, EchoStar claimed the additional cost of the proposed rate hikes would amount to hundreds of millions of dollars a year.

Prior to the settlement, Ergen said Viacom was interfering with the right of viewers to receive CBS over the public airwaves that had been given to the programmer for free by the U.S. government. “DISH Network will always have a place for CBS, and we’re willing to pay for retransmission rights, but Viacom is holding the public airwaves hostage, trying to extract concessions and higher rates on programming unrelated to CBS,” Ergen explained.

During yesterday’s conference call, Ergen said his company could have short-term fallout from the temporary loss of channels but long- term gains for doing “everything we can” to avoid raising rates.

“We get more heat from raising prices than we do from taking down channels, by a large factor,” Ergen said.

Scott Blake Harris, managing partner of the Washington-based Harris, Wiltshire & Grannis law firm, said he was not aware of a “sound argument” that Viacom violated the law by negotiating for carriage of its broadcast stream, either for cash or for a bundle of broadcast and cable content.

“On the other hand, EchoStar is perfectly within its rights to stop carrying Viacom if a deal can’t be reached,” Harris said. “This is how the free market works. Sometimes people reach a deal, other times they don’t — at least [not] right away. Obviously, it’s better for everyone if both sides are reasonable and strike deals quickly. While the market isn’t always neat, it tends to be far better than the alternatives.”

Viacom’s demand that EchoStar begin to carry Nicktoons will impede DISH Network’s ability to provide new, independently owned channels with a broad appeal, Ergen said.

“We are not thrilled about needing to add an additional channel that will take away from the independent programmers,” Ergen said during Thursday’s conference call. DISH Network agreed to add Nicktoons to its America’s Top 180 package this spring.

Offering Refunds

DISH Network is providing a $1 monthly credit to customers who lose CBS programming in the following markets: Austin, Boston, Baltimore, Chicago, Dallas-Ft. Worth, Denver, Detroit, Green Bay, Wis., Miami-Ft. Lauderdale, Minneapolis, Los Angeles, New York, Pittsburgh, Philadelphia, Salt Lake City and San Francisco. Other channels affected by Viacom’s demands included BET, Comedy Central, MTV, MTV2, MTV Espanol, Nickelodeon, Nick Games & Sports, Noggin, VH1, VH1 Classic, and CBS-HD East and West. EchoStar also is offering a $1 credit to subscribers of certain programming packages who have lost key Viacom channels during the past week.

To put pressure on EchoStar prior to the blackout, Viacom flashed messages across the bottom of its programming early last week warning viewers that DISH Network subscribers would be losing their shows. EchoStar was unmoved.

Viacom officials complained prior to resolution of the conflict that they had tried fruitlessly for months to strike a deal with EchoStar. –Paul Dykewicz

(Steve Caulk, EchoStar, 303/723-2010; Steve Effros, Effros Communications, 703/631-2099; Douglas Shapiro, Banc of America, 212/847-5678; Scott Blake Harris, Harris, Wiltshire & Grannis, 202/732-1300; Carl Folta, Viacom, 212/258-6352)