THE ORIGINS OF THE FOX – DISH DISPUTE
The following article is from guest writer, Howard Roark. Howard tells us the story behind the story of the Fox v. Dish dispute.
Back in the early and mid 1990s, there were three satellite positions over the United States that were auctioned off to broadcast television back to earth. The first was bought by former Hughes Aerospace and became what we know today as DirecTV. Back then, satellite providers were not able to broadcast local channels, so satellite was at a distinct disadvantage to cable and over the air broadcast TV (rabbit ears). The second and geographically the least favorable slot, since is did not cover the entire continental U.S., was purchased by a former poker player named Charlie Ergen who named his company Echostar, the current DISH Network. The final slot was purchased by the phone company MCI (remember them?) who had just received a huge cash investment by British Telecom.
Rupert Murdoch, the CEO of News Corporation, the parent of the network FOX, is the pioneer of the direct broadcasting satellite (DBS) business. He founded BSkyB, the leading multi-channel broadcasting company in Great Britain which has larger market share in that country than even cable. Murdoch also owned satellite companies in Australia and South America and desperately wanted a significant DBS presence in the U.S. Unfortunately for him, his ally MCI had a favorable geographical position, but was the third mover into a market that only had room for two competitors since cable had such huge market share. In 1997, Murdoch struck a much-publicized 50-50 alliance with Echostar. The former brought a strong balance sheet, a favorable longitudinal position over the U.S. and a few, yet to be launched, satellites to the table while the latter added in its existing customers and its recognized brand in the marketplace. Everything was in place to create a viable competitor to DirecTV and, more importantly, to cable.
Six months later, the deal between Fox/MCI and Dish Network fell apart, mostly because Ergen and Murdoch, two gigantic egos, could not get along. The ostensible cause of the split was that Dish did not agree to use the encryption technology and set top boxes developed by one of News Corp.’s affiliate companies. This technology is strategic in that it allows control of the end customer, something both companies ultimately wanted. Also, by then, Dish’s cash position had improved, and Ergen did not need Murdoch’s balance sheet anymore. But, Dish still lacked full coverage of the U.S. due to where its satellites were located in space and the curvature of the Earth. Ergen gambled and decided to go it alone, thereby essentially killing the Fox/MCI venture which had no satellites in space and no customers.
In a humiliating moment in an otherwise brilliant career, Murdoch was forced to sell his satellite position and other DBS assets to Ergen at far less than they had been valued when the two companies had merged.
This handed Dish total coverage of the U.S. while eliminating an unprofitable investment for Fox.
It is safe to say Murdoch has never forgiven Ergen for this unusual defeat. The story did not end there, however.
Hughes Corporation, which had been owned by General Motors, broke up and DirecTV sold to Murdoch’s News Corporation in 2003. Hence, Murdoch now had his coveted foothold in the U.S. DBS market. Over the past few years, both DirecTV and Dish, which now both carry local channels, have both grown spectacularly, mostly at the expense of cable. For television, satellite is a far superior product economically and technologically to cable. It is cheaper and more efficient to send another ‘bird’ into space to add channels and HD capability than it is to dig up streets and rose bushes that terrestrial solutions require to improve their plant.
Recently, the market has matured and new competitors such as FIOS and Uverse, funded by deep-pocketed phone companies, have entered the market. Today, all multichannel providers have deep HD offerings, robust channel lineups and electronic guides. Competition is less about the number of channels and quality of signal and more about which specific channels can be offered and at what price. To remain viable as a distributor of television programming, a multichannel provider has to have the channels the customer wants to view.
Rupert Murdoch was the first to recognize this new paradigm by marrying his content (FOX) with distribution (DirecTV). The largest cable company in the U.S., Comcast, also recognized its need to defend its investment in cable plant by guaranteeing its access to high-quality content, hence its acquisition of NBC-Universal. Now, any competitor that would threaten Comcast with a loss of carriage of a particular network could face instant retaliation with the loss of the NBC network. Of the major distributors, only Dish Network does not own its own content making it highly vulnerable to the demands of the owners of the content it retransmits over its satellites. It is this weakness that Murdoch is exploiting as he gains his revenge on Ergen.
Ultimately, in the current saga, the customers do not care about Dish or any multi-channel provider. They only care about access to the sports content that FOX owns. As Dish customers recognize that their sports are no longer available on Dish, they will inevitably find other alternatives to access this programming. Dish’s options are also simple. They will have to pay the price for content that FOX is demanding or see its user base significantly erode. This will mean lower margins for Dish.
At the end of the day, one sees the genius of the Free Enterprise System and Adam Smith’s ‘invisible hand’ working its magic. The highest returns are accruing to the owners of content. Distributors of that content are going to be inevitably squeezed by competition and the biggest winner is the customer who receives a wealth of programming unimaginable a few short years ago at an attractive price. I defy any government bureaucrat to come up with a better solution. As the writer who brought me to life would say, the genius of the individual will always come up with a better solution than the sloth of the State.