Dish Chief: TV Needs to Change
Dish Network Corp. (DISH) Chairman Charlie Ergen said a new ad-skipping feature that has infuriated major broadcast TV networks is a "competitively necessary" response to the explosion of cheap Internet video. That Web video threatens the pay-TV ecosystem, he added, and it is partly caused by the TV networks themselves.
In a rare interview, Mr. Ergen for the first time explained publicly his rationale for introducing the ad-skipping service called Auto Hop last month. The reclusive satellite TV pioneer said the broadcast networks, several of which have sued Dish over the ad-skipping feature and have refused to run Dish ads promoting a Dish digital video recorder, have been "more emotional than realistic."
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With the new service, Mr. Ergen aims to force the networks to develop "more meaningful" ads, using, for example, demographic targeting of viewers. "Ultimately, broadcasters and advertisers have to change the way they do business or they run the risk of linear TV becoming obsolete," he said. "I think the conversation is going to go a lot faster because now there is a risk of inaction as opposed to no risk of inaction."
Over four hours last Friday, both at his Englewood, Colo., headquarters and his favorite pancake restaurant nearby (the famously frugal billionaire ate a half stack of buttermilk pancakes, price $2.98), Mr. Ergen mused on the dangers posed to pay TV by cheap online video, his plans for a mobile broadband network and the similarities between business and his favorite games of chance—poker, blackjack and backgammon.
Mr. Ergen is the antithesis of the modern business executive. Fifteen years ago, when his teenage daughter had to get braces on her teeth, he promised he would wear a set to keep her company. When the time came, he tried to back out.
His daughter responded that he was behaving like News Corp. (NWSA) Chairman Rupert Murdoch, who had recently pulled out of a tentative satellite joint venture with Dish's predecessor company EchoStar. The Journal reported in 1997, citing people close to Mr. Murdoch, that he had realized he had rushed into a bad deal. News Corp. Thursday declined to comment.
The Dish chairman ended up wearing braces on his teeth for a year and a half. "She called me out," he recalls. "It was a pretty good life lesson."
A professional gambler before he founded Dish in 1980 with his wife and a poker buddy, Mr. Ergen said he thinks of business as one big card game where he likes to "play the odds." Dish is now the third biggest pay-TV distributor, after DirecTV (DTV) and Comcast Corp. (CMCSA), with about 14 million subscribers. Mr. Ergen's controlling stakes in Dish and another satellite-technology company are worth $8 billion.
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His poker experience has come in handy in the dispute over Dish's "Auto Hop" ad-skipping service. With poker, "You can win with bad hands. You start learning about how emotion plays into people's decisions," he says.
But Mr. Ergen doesn't discount the role of luck, which may be why he has several bottles of feng shui water in his office and says he has "feng shui-ed"—with rituals for luck—all his satellite launches since Dish first sent a satellite into the sky in 1996 on a Chinese rocket that was charmed by auspicious Chinese water and chants.
Dish has had a contentious relationship with many entertainment companies for years, particularly over the so-called "retransmission" fees it has to pay to carry broadcast networks' programming. Some TV executives have accused Dish of releasing the new ad-skipping service to gain more leverage in negotiations over those fees, a strategy Mr. Ergen implicitly acknowledged.
"If the ad is skipped, the consumer likes it, but it's not necessarily good for me and it's not necessarily good for the broadcaster because I'm in the same ecosystem as him," Mr. Ergen said. "So we have to figure out how the broadcaster benefits, we benefit and the consumer continues to feel like he gets a fair deal. So maybe [the consumer] pays a little bit less for 'retrans,' his bill doesn't go up by double digits every year.... That's an interesting conversation to have."
So far, the service has provoked an intense backlash from broadcasters. On Wednesday, Dish said a Dallas-based TV station group, Hoak Media Corp., pulled 14 stations in six states off Dish's service. Dish said Hoak is demanding a 200% rate increase and is asking that Dish turn off Auto Hop. Hoak didn't respond to requests for comment.
Two weeks ago, in what it says was a pre-emptive move, Dish sued in federal court in New York, seeking a declaratory judgment that it has the right to offer the ad-skipping service. Within hours, three of the networks filed suit in a different court, claiming the service is a breach of copyright.
The dispute comes as the pay-TV industry is grappling with a saturated market—at least 90% of the U.S. households with TV sets have cable, satellite or phone-company-delivered subscription TV, according to Nielsen—and as the availability of cheaper online video options is growing.
Mr. Ergen, 59 years old, says four of his five children have stopped paying for a TV subscription, and the fifth is living home. Motioning to his daughter sitting next to him in the restaurant, he says she and her friends "come home and bring out their tablets" and surf online "until they find something free that they want to watch."
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He also complains the broadcast networks are making many of their programs available free online on various sites, including their own and Hulu, which is controlled by several big network owners (including News Corp., which owns Fox and The Wall Street Journal).
What's more, he notes, the shows carry fewer ads online than when they were originally broadcast, which makes him think the broadcasters' complaints about Auto Hop are "disingenuous."
A Fox spokesman said in a statement that "while Mr. Ergen wraps himself in the flag of 'innovation,' the idea of using technology to exploit others' intellectual property for personal gain is not a new or innovative idea." The spokesman also said "Dish hasn't unleashed this product on the vast amounts of cable programming in which it sells advertising," where it has "ample opportunity" to test Mr. Ergen's advertising ideas.
CBS said in a statement, "In the end, we expect our programming content to be handled responsibly by distributors. When that's not done, we have to look at all options." ABC declined to comment. NBC didn't respond to requests for comment.
Mr. Ergen says networks—and advertisers—need to develop more targeted commercials "that you're not going to want to hop over," and he says he has "half a dozen creative ideas" about how to do that.
Efforts to develop more targeted TV ads have been tried for years, gaining little traction, partly because of concerns about privacy. One ad executive expressed skepticism about Mr. Ergen's suggestions. "That's like putting nice drapery on top of a casket," he said. "It's 99% more likely that the conversation…is about retransmission fees."
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