Dish Network Corp. (DISH:US) is talking to networks such as Viacom (VIAB:US) Inc.’s MTV about offering their channels over the Internet, a service that could shift the economics of the pay-TV industry, five people familiar with the plan said.
In addition to Viacom, the negotiations involve the Spanish-language broadcaster Univision Communications Inc. and Scripps Networks Interactive Inc. (SNI:US), owner of the Food Network and HGTV, said the people, who asked not to be named because the talks are private. The companies would offer an online product known as an over-the-top service, charging a lower price for a smaller bundle of channels viewable on a computer or tablet.
Dish’s service would change the dynamics of the pay- television business, breaking up the bundles that force customers to pay for channels they don’t watch. It also gives Dish a way to avoid its biggest programming expense: sports. Walt Disney Co. (DIS:US)’s ESPN gets as much as $5.13 each month for every cable and satellite subscriber, compared with the industry’s average of 26 cents, according to SNL Kagan.
“That’s when you could start seeing a few cracks in the ecosystem,” said Alan Gould, a media analyst at Evercore Partners LLC in New York. “The addition of an over-the-top service would be significant.”
The effort would mark the biggest attempt to create an online service with live cable channels, a break from the approach taken by Netflix (NFLX:US) Inc. and Hulu LLC. For Dish, the move would decrease its reliance on its satellite-TV service, which ranks second to DirecTV (DTV:US) in U.S. customers. It also gives it a way to undercut pay-TV competitors on price.
Dish rose 1.8 percent to $30.97 at the close in New York. The shares have gained 8.7 percent this year.
Cable networks, meanwhile, have been reluctant to break up their suite of channels and sell them a la carte because it would lower the amount of available advertising inventory. Viacom and other cable networks typically sell ads at a lower rate than the big broadcast networks such as CBS Corp. (CBS:US), so they rely on volume.
Viacom would be willing to sell smaller bundles of its networks, which also include Nickelodeon and Comedy Central, at a higher rate per channel than it does for its full complement of programming, according to two executives familiar with the situation.
Bob Toevs, a spokesman for Englewood, Colorado-based Dish, declined to comment. Mark Jafar, a spokesman for New York-based Viacom, also declined to comment, as did Mark Kroeger at Scripps and Matt Biscuiti at Univision.
A central question is whether consumers want smaller bundles that lack sports programming. Several pay-TV operators, including Dish and Time Warner Cable Inc. (TWC:US), already offer cheaper packages that don’t include sports. Those offerings aren’t very popular, said Amy Phillips, a spokeswoman for ESPN, the biggest cable sports network. “History shows that very few households subscribe,” she said.
Dish offers a $20-per-month satellite package without ESPN, though it also lacks other top channels such as MTV and HGTV. Cable and satellite companies have agreements with ESPN that require the video distributors to include the sports network in their most popular tier of TV service.
Dish Chairman Charlie Ergen, who co-founded the company, has said there will be a day when a pay-TV operator chooses not to include sports in order to charge $10 to $20 per month less than competitors.
“My mom doesn’t watch sports,” Ergen said during a conference call last month. “I’ve got neighbors who don’t want sports. I’ve got friends who go to the bars or the neighbors’ house to watch sports.”
Dish’s plan would go beyond the constraints of the so- called TV Everywhere initiative, already adopted by most of the major networks. Programmers such as CNN and HBO, both owned by Time Warner Inc. (TWX:US), offer the option to people who already pay for television, letting them watch those same channels on their phones, tablets and personal computers.
Time Warner Chief Executive Officer Jeff Bewkes has said it wouldn’t make sense to sell HBO directly to the 6 percent of homes in the U.S. who don’t have cable or satellite service.
“There are some of those people that if you sign them up, they would die the next day -- these are people that are old,” he said at an investor conference last week.
Still, some younger people are abandoning conventional cable TV in favor of Internet services. Dish wants to reach consumers around 18 to 28 who would rather pay $20 a month for a smaller package of channels to watch on computers or mobile devices, CEO Joseph Clayton said in an interview this month.
The challenge is getting a “critical mass” of companies to give online rights to live shows, Clayton said. Negotiations bog down because programmers aren’t willing to sell Dish the rights for a low enough price to make a service viable, he said. Dish’s satellite customers paid an average of about $78 a month in the second quarter.
Netflix and Hulu, two of the biggest providers of TV and movie content over the Internet, don’t carry live programming, which is considered valuable to advertisers because viewers are less likely to skip commercials.
One hurdle to an Internet-only service, according to programmers: Nielsen doesn’t measure online video the same way it does with television. That makes it harder to track how many people are watching and sell advertising based on that audience.
Nielsen can measure online viewing audiences provided that programmers broadcast the same ads online as they do on television, said Brian Fuhrer, a senior vice president at the ratings company. Websites such as Hulu, which sells different ads during the shows it streams, would require special coding for Nielsen to count.
Dish would be competing with Aereo Inc., a startup backed by Barry Diller’s IAC/InterActiveCorp (IACI:US) that lets users watch some live television over the Internet for a fixed monthly fee.
The broadcast networks, including News Corp. (NWSA:US)’s Fox and CBS, sued the company in March for what they consider the illegal retransmissions of their broadcast signals. The networks normally receive fees from television distributors such as Dish. New York-area cable provider Cablevision Systems Corp. filed a brief in support of the broadcasters last week.
Dish and Aereo don’t expect to get separate Internet rights from the major broadcast channels -- Fox, CBS, NBC and ABC -- according to two people familiar with the negotiations. Fox, CBS and NBC also are suing Dish over its AutoHop Ad-Skipper, which allows Dish customers to instantly bypass commercials for network shows the day after they’re first aired. Dish has filed its own lawsuit against all four networks.
Aereo, based in New York, is in talks with a number of cable networks, including Viacom, to get rights to an older library of shows, similar to what’s available on Netflix, according to two executives with knowledge of the discussions. Aereo would pay for that content, unlike what it does with the broadcast channels’ programming, according to the people.
Aereo CEO Chet Kanojia said at an investor conference last week that additional content would be packaged a la carte or in “micropackages” for an additional $2 or $4 a month. The company plans to pair the broadcast networks with independent cable channels and new Internet-only products from network companies to give customers streaming movies, news and sports.
Aereo charges $8 a month plus tax for its standard service, which is only available in New York City. Kanojia said he plans to expand Aereo to as many as 15 markets before the end of 2013.
Dish already delivers an online service called DishWorld to overseas audiences, who watch it using set-top boxes from Roku Inc. Anthony Wood, CEO of Saratoga, California-based Roku, said he has been approached by several media companies looking to offer over-the-top services and expects to see some blossom in the U.S. soon.
“We will see that in the next year,” he said.
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