In the multichannel video programming distributor, or MVPD, space, there is perhaps no CEO more loathed than DISH Network's (NASDAQ:DISH) Charlie Ergen. In 2013, The Hollywood Reporter bestowed this title of "The Most Hated Man in Hollywood" on Ergen after DISH filed suit against ABC, CBS, Fox, and NBC in federal court to validate the company's ad-skipping AutoHop technology. This seems silly now as recordable DVRs have grown in popularity, but at the time, broadcasters feared the technology would decimate the television ecosystem.
Additionally, DISH has been in the middle of some of the biggest carrier disputes with content providers, just wrapping up a contentious negotiation with Viacom (NASDAQ:VIA). Since 2010, the company has feuded with The Weather Channel, AMC Networks, Turner Networks, and even the WWE. However, perhaps the biggest feud was with 21st Century Fox in regard to its popular Fox News channel. In a discussion at the University of Colorado a few years ago, Ergen said he "may be the only CEO who likes to go to depositions."
Although Ergen is persona non grata among broadcasters, he's the best advocate for his consumers. In the end it's not Ergen who should be blamed; it's a flawed business model.
Fox News dispute shows the problems with pay-TV's business model
The best example of the flaws with televisions business model was DISH's dispute with Fox News, which ended last year with a deal that brought Fox News and Fox Business Network back to Dish. Normally, negotiations between MVPDs and networks are conducted in proverbial smoke-filled backrooms, but this dispute spilled into the greater public, with Fox News accusing DISH of "censoring" Fox News when the network was blacked out. DISH countered it was Fox News' decision to pull the channel from its lineup after negotiations broke down.
DISH added more detail on a pop-up website detailing the issue with negotiations:
Both sides came very close to an agreement on new rates. However, during the negotiations, Fox demanded a surcharge that would have tripled the rates on an unrelated, less popular channel. To make matters worse, DISH already had a contract for that channel which doesn't expire for some time.
At that time I argued DISH was wise to reject Fox's deal, and DISH appears to have won concessions. According to follow-up reports, the "less popular" channel was Fox Sports 1 and was later dropped from Fox's demands. The "winner" was not DISH Network, though -- it was all DISH Network's subscribers, who were spared from paying a tripling of fees on a channel before its contract warranted it.
Third-party payment schemes result in suboptimal outcomes
Ergen could easily be liked by broadcasters, and it would most likely cost him very little. All he'd have to do is agree to any price increase programmers asked for -- after all, DISH will simply pass along these increased costs to consumers. A Federal Communications Commission report found the price of basic expanded cable increased 198%, from $22.35 in 1995 to $66.61 in 2014, or 5.9% annualized. That's a larger increase than for tuition and fees for a four-year college degree or medical care, which, from 1994 through 2014, increased 110% and 106%, respectively, versus the CPI's increase of 60% during the same period. On an annualized basis, those figures are 3.8%, 3.7%, and 2.4%, respectively.
The FCC's report focused on cable providers but noted that DISH Network had the lowest overall cost from a competing service and a per-channel cost 17% lower than cable.
Ergen's at least minding the store in a flawed market
I have a simple philosophy as it relates to businesses. There may be short-run dislocations, but in the long run, value will eventually flow to the entity that creates it. Because of the lack of a la carte programming, that's not what's happening in pay-TV now. What we're currently experiencing is a consumer shift in which many are rejecting the bloated package of the pay-TV model.
As a result, many households are trading down to smaller pay-TV packages, cord-slimming, or going without the service altogether, also known as cord-cutting. While large, persistent content price increases are good for Kardashians, professional athletes, and million-dollar pols who tell their audience what candidate they should vote for, it's bad for average families scraping to get by.
In the absence of a market in which the consumer directly chooses what to consume and pay for, Ergen is the next-best thing. The CEO's brash approach of dealing with programmers to keep content costs low benefits all DISH's subscribers and, tangentially, all pay-TV subscribers, as future programming negotiations are often based upon recently closed deals. For that, Ergen is deserving of respect from all pay-TV subscribers, even if he remains the most hated man in Hollywood.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool owns shares of and recommends AMC Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.