Some segment of every population will always seek a free hack. That’s human nature. And although broadcasters haven’t felt it much in the past, rampant piracy of their content is threatening their future.
Why? Well, the main reason is because broadcasters’ business models are changing, and pirates like that. Another reason is because pirates can. They make themselves capable of stealing the new, more expensive content. Pirates say it’s challenging and fun to figure out ways to “outsmart the smart ones,” and some even turn the practice into a profitable business for a reasonably long time.
Thus, especially as more – and more valuable—broadcast content finds its way toward mobile devices and onto the Internet, hundreds of millions of broadcasters’ dollars are at the mercy of these content thieves.
Satellite, Cable and Telco Pirates
Piracy among today’s multichannel pay TV providers appears greatest among cable analog subscribers and would-be EchoStar subscribers. As seen recently by EchoStar’s mid-September announcement of its extensive efforts to crack down on signal thieves north of the U.S. border, EchoStar is hoping to take some control of the problem in the form of enforcement exercises. Just as serious for EchoStar, in part because of the DISH leakage, satellite rival DirecTV has already gone more than a year beyond the typical 18-month hack cycle that was last stopped by Rupert Murdoch in April 2004, via the implementation of a still-secure P4 smart card. After nearly fifteen card swaps in the U.K. with his pay service, BSkyB, Mr. Murdoch definitely knows his pirates.
On the cable side, analog systems remain greatly at risk, while digital systems remain generally unhacked. For digital, this has to do with the complexity of the encryption built into the new boxes. Additionally, in the future, digital cable providers are positioned to do card swaps to deter future theft of services. Analog, on the other hand, suffers from people who crawl up telephone poles to disconnect filters and boxes that get altered. At its worst, The Carmel Group estimates that several years ago more than $2 bil. annually was lost to cable hackers.
For telcos, they, like broadcasters, have not yet felt the true threat of the piracy scourge. Yet as they create new content and new content delivery models, the hackers will move toward them, as well.
For Broadcasters
Broadcasters, adding new digital subscription (pay) models, will encounter a new protocol: As they seek to control their content, they will begin using encryption. Encryption in turn triggers pirates to begin stealing broadcasters’ subscription video content delivered via the Internet, digital multicast or to more and more mobile devices (such as cell phones). To the pirates’ way of thinking: Why pay $1.99 for an episode of the Desperate Housewives, delivered to a cell phone or MP3 player, when some challenging (and entertaining) creative mischief can develop processes that make that content come to some (or many) for free? In that vein, a lot of piracy today gets done in the labs at college campuses, by real college researchers.
Working with Hollywood studios, especially, the next generation of broadcasters will have to work to create educational, enforcement and technical incentives aimed at shifting the would-be pirates’ motivation from one that encourages theft to one that instead encourages payment for services rendered. Although paid-for content from broadcasters remains rare, the Internet and multicasting infrastructures may well create many lucrative pay-TV content opportunities, which tomorrow’s broadcasters must begin protecting now.
For Hollywood, one of its more memorable lines of the past several decades was, “If you build it, they will come.” The same mantra applies to thieves trying to steal subscription broadcast content, wherever it exists: If broadcasters create it, the pirates will come.
Notes respected piracy expert, Jim Shelton, “The next generation of broadcasters will have to work closely with a pretty sophisticated group of studios and operators, and start early, if they are going to manage the Monster of Piracy.”
DISTANT SIGNALS: ECHOSTAR GAMBLES ON
TVNEWSDAY, AUG. 29, 2006, 3:46 PM ET
While the satcaster announced it had settled its dispute with the broadcast networks, Fox is still holding out. What does that mean?
By Jimmy Schaeffler
Echostar yesterday announced that it had agreed to pay broadcasters $100 million to settle a dispute over Echostar’s distribution of distant network broadcast signals (DNS).
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Surprisingly, Echostar’s stock actually rose on the news, as some investors figured that the satellite operator had finally ended nine years of bitter litigation with broadcasters and removed a large measure of uncertainty from its earnings reports.
But the game is certainly not over. A key player in the dispute—the Fox station group—is not part of the settlement. And, until it joins in, Echostar still faces the prospect of cutting off all of its DNS subscribers—a draconian measure that would cost it far more than $100 million.
So why the premature press release? The way I see it, this is classic Charlie Ergen. The Echostar chairman is trying to pressure Fox into settling by depicting Fox as the lone recalcitrant—and unreasonable—holdout. Fox must be demanding big bucks (or big concessions). And Charlie has much to lose if Fox continues to play it tough.
Read between the lines of the Echostar release: “EchoStar had hoped and expected to resolve the dispute with all remaining litigants, but late last week Fox Network declined EchoStar’s universal settlement offer and pulled out of the discussions. Consequently, litigation with approximately 25 Fox owned-and-operated stations continues. Though unlikely, it is possible Fox’s last minute tactic could derail the entire settlement and force EchoStar to seek legislation to protect its subscribers from disruption.”
The proposed settlement follows a devastating decision against Echostar by the federal appeals court in Atlanta. In doing so, the court said, EchoStar had violated the rights of local affiliates, the plaintiffs in the case. last May. That three-judge panel determined that EchoStar had for years repeatedly and as a pattern violated restrictions on where it may offer DNS.
By copyright law, satellite operators may offer DNS service only in areas where viewers cannot receive local network affiliates over the air. Testing for DNS is mandated under federal law.
Finding that Echostar’s disregard for the testing requirements was flagrant and widespread, the court ordered Echostar to cease transmission of DSN to illegal and legal subscribers. That order is set to take effect in a bit under three weeks, on Monday, Sept. 11.
The settlement now on the table would mean Echostar terminates DNS service to illegal subscribers, but continues to provide service to the legals.
But without Fox on board, the settlement is unlikely to get the blessing of the federal district court in Florida, where the case was first heard. As a result, Echostar may have to turn off service to all 800,000 of its DNS subs—legal and illegal.
That would mean a loss of $50 million a year (at $5 per month per DNS sub). Plus, if the loss of DNS service caused just 20% of those subscribers to defect to rival cable operators or DirecTV, EchoStar would be faced with additional annual loss of $115 million based on average monthly revenue per sub of $60. Subscriber acquisition costs of $600-plus get added to that.
These numbers might be significantly smaller if the settlement sticks, Fox gets added, and Echostar only has to turn off service to illegal subs.
What makes this all incredibly difficult and also incredibly far from final (and contrary to what EchoStar’s stated in its headline and first three paragraphs of its press release), is that Charlie Ergen’s arch rival Rupert Murdoch controls Fox and DirecTV. Murdoch has lost multiple battles with Ergen in the past, and is very likely enjoying the fact that he holds the better hand in this game.
Just this past Sunday, DirecTV ran a full page ad in my local paper, The Monterey County Herald. “Attention DISH Network Customers,” the headline said. “You’re about to lose ABC.” The text in the ad went on: “Dish Network is being forced to turn off certain network stations as a result of their illegal activity.”
But Ergen isn’t giving up. In addition to using the settlement with the other broadcasters to pressure Fox, EchoStar also said that its lack of a settlement could “force EchoStar to seek legislation to protect its subscribers from disruption.”
That seems a hollow threat. Ergen is the master of rallying his subscribers to protest the greed of Big Media (that’s Big Media other than himself, typically). But it’s unlikely that Congress would act quickly enough to save him in this case.
For my bet, moving toward the second Monday in September, the Fox station group will reach a big settlement with EchoStar. Per subscriber, Murdoch’s 25 stations will get more from EchoStar than the deal that is currently on the table involving the other broadcasters. Ergen the Gambler will have lost the battle.
Yet in the larger war with broadcasters to change the way distant broadcast signals are distributed, Ergen’s wagers have likely just begun. As he learned from time spent at the Nevada tables, the longer he plays the game, the more chances he has to win.
Jimmy Schaeffler is the chairman and chief service officer of The Carmel Group, an 11-year-old Carmel-by-the-Sea, Calif.-based consultancy, publisher and conference organizer that focuses on the global multichannel industry. He can be reached at jimmy@carmelgroup.com and 831-643-2222.
