Distant Network Signals: 800,000 TV Homes At Risk From Legal and Political Moves

By: Jimmy Schaeffler

Related Blog:

EchoStar vs. DirecTV: Rupert’s Wile Costs Charlie 800,000 DNS Subscribers

By The Carmel Group’s Jimmy Schaeffler

Years ago, at an analyst event in Vail, CO, EchoStar chairman Charlie Ergen stated that he measured his legal department as he did other company divisions, by the profit it produces. Measured by that standard, the 2006 EchoStar legal department’s income statement might well experience something of a profit shortfall, perhaps taking the division well into the red.

Presently in settlement talks with the nation’s broadcasters, EchoStar is negotiating around a rather weighty (and scathing) decision and remedy coming out of the 11th circuit federal court appeals in Atlanta, GA. That three-judge judiciary determined May 23, 2006, that EchoStar had, for years, repeatedly violated copyright rules under the Satellite Home Viewer Improvement Act (SHVIA) (17 U.S.C. §119), stating which of its satellite viewers nationally may properly receive Distant Network Signals (DNS) shipped from L.A. and NYC. The draconian statutory remedy is to cease the transmission of all DNS signals to both legal and illegal subscribers, as well as to some of those in adjacent areas, on or before Monday, September 11, 2006.

EchoStar’s Cards

Yet consumers are not the only ones at risk. EchoStar is in danger of losing what it reports are roughly 800,000 DNS subscribers. At roughly $5/subscriber per month – which is only the DNS fee, to say nothing of the overall average monthly subscriber revenue of more than $60/mo. – the annual loss to Ergen’s DISH Network comes to almost $50 mil. Plus, using conservative estimates, if EchoStar loses altogether 20% of its DNS subs because of dissatisfaction with a DNS cut-off, another $115 mil. falls from its books due to churn. Those subscribers going over to EchoStar rivals DirecTV or cable is another downside. Or, if EchoStar settles, and pays broadcasters a fee for past damages that amount to even 50% of never-compensated DNS revenues, that, too, could take the Littleton, CO-based video concern hundreds of millions dollars deeper into the financial rouge.

More broadly speaking, the Direct Broadcast Satellite (DBS) industry as a whole has for years been squirming under a statutorily-mandated testing model, called the Longley-Rice Predictive Model. This test uses consumer zip codes matched to a map originally created in the 1950s to measure local station vs. local station signal interference. Not only was Longley-Rice not designed for DNS, more importantly, satellite operators insist that at the edges of the testing contours, only 50% of the TV homes can receive a quality picture 50% of the time. Not surprisingly, the DBS folks believe Longley-Rice and its results are flawed, both for them and their customers. 

Consumers and Congress

Many surmise that what EchoStar is really trying to achieve through the lawsuits is the creation of enough consumer rebellion following a shut-off, such that legislators will be overwhelmed by complaints. The lawmakers would be forced into readdressing the presence of the Longley-Rice model to measure consumer DNS access in the first place. 

Statistically speaking, federal reps from rural states are more likely to feel the DNS heat, because DNS is a greater factor in smaller, rural Designated Market Areas (DMAs). These DMAs receive fewer local-into-local channel (LIL) offerings from either EchoStar or DirecTV, which means switching DNS subs to LIL packages won’t work as well in those rural states. Nonetheless, comes mid-September, if EchoStar and the networks have not reached an accord, just about every political person around the Beltway will know the term “distant network signals.”

Broadcasters’ Hand

In Longley-Rice, what the broadcasters see is a model that has been through a thorough legislative process within the past ten years. Right or wrong, it’s currently the law, and if EchoStar and others are to challenge it, they need to do so in a lawful manner. To broadcasters, that means process in the halls of Washington, DC, rather than the streets, DMAs, and homes of America. 

Part of the reason for the broadcasters’ position is their relative power and effectiveness in Washington, DC. Few other lobbies and trade groups are as successful at fulfilling their members’ missions. In addition, under a different testing model, chances are many more viewers across the nation will be shown to be incapable of receiving proper signals. That measure, in turn, would lessen the broadcasters’ profits when charging advertisers based on the size of the TV populations they serve.

Moreover, the combined relative strength of both EchoStar and DirecTV in Washington, DC is nowhere near that of the NAB and the broadcasters, giving the broadcasters even more positioning in either a negotiated settlement or a legislative review of the existing rules and guidelines. 

Deciding DNS

Literally hundreds of thousands of people in the U.S. live behind hills, or behind buildings, or other obstacles, meaning they cannot receive quality TV signals from their local network affiliates. Carried into the 21st century, if a consumer does not qualify under the Longley-Rice predictive criteria, he or she can request that the satellite operator and the local station send a technician out to individually test his or her signal strength, after which approval to receive certain specific individually tested stations may or may not be granted. The local stations typically pay the testing fee. 

For decades, the satellite industry has been critiquing the accuracy of the laws and testing procedure, however, whatever its defects, SHVIA remains the law under which both EchoStar, DirecTV and broadcasters must operate – at least until Congress or the courts (or both) design and implement a new one.

Possible Solutions

Ideally, these parties would immediately agree to mandatory binding arbitration.
Why? Because presently there is so much bad blood and distrust between EchoStar and the broadcasters—and so much to lose by consumers—that cooler heads need prevail.

But if history teaches us anything, the parties won’t do that.

Interestingly, DirecTV decided years ago to strictly abide by the above-described SHVIA guidelines. It has chosen not to be a party to the recent DNS lawsuits, according to its spokesperson, and it appears not to have an overriding problem with the DNS guidelines. As EchoStar continues toward settlement, the broadcasters will likely paint it further into a corner, requiring it also to behave like DirecTV does. [See “Letter From DirecTV To Consumers Describing the DNS Process,” inset]

In sum, EchoStar will have two key choices in the next few weeks ahead. First and foremost, EchoStar will decide if it is to enter into a settlement with the broadcasters. That would mean some number of truly “illegal” subscribers will be turned off, and a large settlement fee will be paid to the broadcasters for past grievances. Second, EchoStar may begin on its own to switch DNS subs to LIL subscriptions wherever viewers reside in LIL-served DMAs. Similarly, EchoStar may decide to help many “illegals” obtain and mount terrestrial TV antennas, so that viewers can properly receive local channels. 

In addition, longer term, EchoStar could again combine with DirecTV and others in the industry to try to push Congress toward replacing the SHVIA and its Longley-Rice predictive model. 

Gauging A Gambler

Historically, EchoStar’s legal department has taken a more aggressive approach to battling these types of matters, often ending in negative results. A well-documented May 7, 2006, article from The Denver Post, that recounts EchoStar’s legal tactics, suggests EchoStar will likely continue to fight more, and settle less. That rules out arbitration and simply accepting the DirecTV way. 

In short, by choosing years ago to fight instead of settle, this time EchoStar’s brilliant risk taker appears to have painted his legal department and his company into a short-to-mid-term disadvantage. Noted one involved NAB participant, “If EchoStar had come to us some months ago, they could have settled this for a fraction of the revenue we’re talking about today.” Losing a lawsuit of this caliber, possibly affecting so many hundreds of thousands of viewers and so many hundreds of millions of company dollars, entails measures of probability, many of which will require reconsideration before a September 11 “death sentence” falls on DISH Network’s income statement. Moreover, for EchoStar’s Washington, DC lobbyists – as the DNS issue becomes less a legal and more a political one —they, too, might well wish they were judged on a basis other than their ability to turn a profit for The Dish That Charlie Built. 

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.

[Inset: “Letter From DirecTV To Consumers Describing the DNS Process”]

Letter
(Date)
(Customer Name)
(Street Address)(Apt #)
(City, State, Zip)
Dear (Customer Name):
We have received your request for signal strength information because you have been denied a waiver to receive broadcast networks from Los Angeles and New York. Here is a summary of eligibility requirements and your options under the terms of the U.S. law—the Satellite Home Viewer Improvement Act ("SHVIA"), 17 U.S.C. § 119—governing our ability to provide you with the Los Angeles and New York networks of ABC, NBC, CBS and FOX.
According to the SHVIA, you are eligible to receive Los Angeles and New York networks from DIRECTV only if you reside in an “unserved household.” An “unserved household” is defined as one that receives less than a Grade B signal from local TV stations via an off-air rooftop antenna. SHVIA requires that we use the Individual Location Longley-Rice ("ILLR") computer model to predict whether you reside in an unserved household. When we ran your address through the ILLR model, the result indicated that you should be able to receive a Grade B or better signal from your local TV stations using an off-air antenna. This means that we are unable to provide you with the Los Angeles and New York networks unless you receive a waiver from your local TV stations. We submitted your name and address asking for a waiver so that we could provide you with these networks despite the results of the ILLR model. One or more of your local TV stations denied our request for a waiver.
Under the SHVIA, the only way that DIRECTV can now provide you with these networks is if a signal strength test performed at your home proves that the ILLR model is incorrect and that you, in fact, do not get at least a Grade B signal from your local TV stations.
Things to know when considering whether a signal test is appropriate for you:
* The test does not guarantee that you will receive Los Angeles and New York networks.
* The test evaluates whether you can receive at least a Grade B signal via an off-air antenna. It does not evaluate your actual picture quality, nor consider whether you have an antenna installed on your roof.
* The test is performed for each local TV station. Some customers qualify to receive one or more of the New York and Los Angeles networks, but often do not qualify for all four.
* Once DIRECTV receives a Signal Test Request Form, we will contact an approved tester in your area. Because not all areas have an approved tester at this time, please understand that the test may be delayed until we can locate someone who is approved by both DIRECTV and your local TV stations. (If you request a test, please do not call us to ask when it will be done, as we will have no information for you at that time. We will contact you to schedule a test as soon as we locate an approved tester.)
To request a signal strength test, please complete the enclosed form and mail it to this address:
DNS Signal Test Request
PO Box 92600
Los Angeles, CA 90009
When the test is complete, DIRECTV will notify you of the results and give you the status of your request to receive the signal of networks in New York and Los Angeles.

Sincerely,

DirecTV