Dish CEO Charlie Ergen, who is still also the chairman of set top and satellite services supplier EchoStar, gave a completely new answer to an old question, in his analyst call at Dish this week. He was asked one of our favorite questions ‘ Why doesn’t one of his organizations, preferably EchoStar, buy TiVo. Perhaps, after all this time, and given that TiVo is now valued at $1.87 billion, having more than doubled over the course of its legal action with Dish, substantially ahead of EchoStar, itself valued at $1.68 billion.
Two years ago EchoStar was worth more than twice that and TiVo less than half, which would have made a merger of the two businesses only possible as a surrender of TiVo to EchoStar. Now it would be more like a takeover by TiVo, giving us the thought that it is an idea that has come of age.
Ergen initially joked that he would have little to do if there was no litigation to manage with TiVo and that he might even see his kids. Ergen is known to have said, ‘It’s gotten too personal’ privately when discussing TiVo, but insisted to an audience of analysts that, ‘We’ve always said that it seems like we should be working together with TiVo. As we’ve got to know them, we’ve developed a lot of respect for what they’ve done.’
Ergen then insisted that it was always a case about an honest disagreement on how Dish DVRs work versus the patents held by TiVo, but he conceded that remaining legal options were mostly last straws and that it was perhaps time that the two companies got together. ‘We are joined at the hip,’ he said, meaning that Dish doesn’t wants its DVRs turned off and TiVo doesn’t want to miss out on a continued royalty stream from at least 4 million homes.
The truth is that Ergen’s stubbornness has cost his company almost half a $billion and the payments to TiVo have kept the company strong when it could have weakened and amounted to considerably more than all of the other royalty payments that TiVo gets from the world. The two companies Dish and EchoStar are setting aside some $30 million a quarter to provide for further royalties, in line with what has been ordered by the courts.
From an outsider’s point of view there is so much merit in throwing the EchoStar set top business in with TiVo, that it is virtually irresistible ‘ unless you’re Ergen. Timeshifting is TiVo’s invention and Placeshifting is dominated by the acquisition that EchoStar made a few years ago in Sling Media. Together they make a pair of technologies that can revolutionize TV viewing and given the battle that TiVo has recently had in enforcing its patent portfolio, and the success of that battle, it is well placed to fight for the same recognition in placeshifting ‘ before the technology is bypassed by Over The Top technologies which are emerging now.
Similarly removal of the close links between EchoStar and Dish would make the placeshifting technology more acceptable to cable and satellite operators around the world. Despite innovative ideas in cable set tops and modems, Dish remains the dominant user of the Sling technology, a company which it acquired in 2007, paying some $380 million.
Having said that, at EchoStar’s results it was revealed that a major cable company in Europe was about to sign a volume order for Placeshifting set tops. There can only be one such buyer and it’s an improbable one. Our contacts have found no new trials or RFPs out in Europe for placeshifting technology and the only existing trial for the technology was announced a few weeks before EchoStar pounced on the company in 2007, and that was with UPC, the Netherlands cable arm of Liberty Global. After two years in trial there Liberty has the power to buy an immense amount of set tops, having around 13 million cable customers in Europe and 20 million world wide, including its recently purchased Unity Media in Germany. The Netherlands operation itself has just under 2 million homes as customers.
Liberty Media is closely aligned, mostly through common shareholders and management, with Liberty Media, and that company is also the owner of direct rival DirecTV in the US, and would not want to feather the nest of its US rival by having its cousin company buy set tops from EchoStar. On the other hand it would make immense sense for Dish and DirecTV in the US to share set top development ‘ and Ergen implied in his Q & A that they have a lot in common with each other and that he would rather take customers from cable than DirecTV.
Already the two have combined on how they introduce interactivity to advertising, so that large advertisers can place single interactive advertising orders over their entire combined 30 million plus US satellite TV infrastructure, rather than having to use two separate technologies and buy through two organizations. This is up against the Canoe initiative of the cable companies that was recently set back a year or so, when it decided to re-evaluate its core technology choice.
So a deal whereby TiVo acquired Echostar’s set top businesses, leaving EchoStar primarily as a satellite services play, insulating the Dish share price from the vagaries of providing satellite capacity (such as satellites that fall out of orbit), might make sense. It would make even more sense if DirecTV was to acquire a minority shareholding in the combined company, and treat it equally as its primary set top maker. It already has a strong commercial relationship with TiVo and has enjoyed that for many years.
We already know that TiVo has begun its conquest of Europe with a deal to create an Over The Top strategy for Virgin media, built around its brand new Series 4 set top, which handles internet video as well as broadcast video and integrates it into its search and EPG systems.
Dish reported revenue for the last quarter up to $3.06 billion 5.2% more than last year and higher than the $2.96 billion it did in the immediate previous fourth quarter. Net income was $231 million which was down on the $313 million it did this time last year with subscriber related expenses (programming cost), subscriber acquisition costs and satellite lease costs (two new satellites coming online) all contributing to an increase in costs.
But on a very positive side Dish added 237,000 net subscribers in the quarter to take its tally to 14.34 million.
Other questions in the Q&A centered on how Dish was planning to use the 700 MHz spectrum that it acquired at auction last year and Ergen played around this question, saying that it was waiting to see how FLO went for Qualcomm (mobile TV) and looking at ways to build it out cheaply, but as yet no decision had been taken. Ergen also said that the outcome of how net neutrality was enforced in the recent FCC battle with Comcast was also important, and it might be that theses airwaves could be either an insurance, if it becomes legal to block Over The Top video, to create a new internet route into customer homes, and if that’s not needed it may well end up as an exercise in spectrum speculation.
Ergen also said that he was testing his spectrum and other spectrum from broadcasters and looking at video mobility ‘ which could lead to the speculation that Dish might be looking to build out a national ATSC M/H network in partnership with local broadcasters, augmented by its satellite transmission capability. But that’s pure speculation. The important thing for Dish investors right now is that Ergen doesn’t commit to an expensive LTE cellular build out, which he then has to pay for.