Dish Comes Up Short In Suit Against ESPN Over Contract Violations

by Trefis Team
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Dish Network (NASDAQ:DISH) recently sought at least $153 million in damages from Disney’s (NYSE:DIS) ESPN, stating that the media company has breached the programming contract by offering better terms to Dish’s competitors. [1] The amount in itself is not material and is less than 1% of Dish Network’s market value. Even if Dish had won in court, it wouldn’t do much for its valuation and instead would have been more of a symbolic victory. However a jury only awarded Dish 1 of the 4 claims against ESPN for $4.85 million for a breach in contract for ESPN’s Spanish language channel. [2] This serves as a setback in Dish’s plans to get better packaging or rate terms for ESPN. This also comes following Cablevision’s antitrust suit against Viacom looking unbundle programming.

See our complete analysis for Dish Network

What’s Behind Dish’s Complaint?

First, the rising programming costs have been a cause of concern for the pay-TV companies in the U.S. Dish Network’s lawyers have stated that while competitor Comcast (NASDAQ:CMCSA) was allowed to bundle ESPN Classic in lower tier programming packages, Dish had to bundle it in its second most penetrated programming package. [1] ESPN Classic has low viewership and clearly Dish doesn’t see value in distributing the network to most of its customers. The additional cost burden creates pressure on margins if the company chooses to absorb it, or the risk of subscriber dissatisfaction if it passes costs on to its customers. The situation can be compared to Cablevison suing Viacom (NASDAQ:VIAB) stating that Viacom forced it to bundle low rated networks in order to get access to higher rated channels such as Nickelodeon and MTV. It appears that the pay-TV industry is giving signals of a significant shift in the landscape and a move towards personalization in pay-TV services.

Second, unfavorable contracts could lead to a competitive disadvantage for Dish Network, which has been trying hard to improve its subscriber trends. 2012 saw some improvement on that front as the company gained 89,000 net subscribers. It is very obvious for Dish, or any other company, to make sure that the competition is fair. Many steps that Dish is taking, including the launch of Hopper DVR, building a wireless network and being strict about cost control, appear to be customer-centric. These initiatives should help the company increase its subscriber base further in the next few years.

Our price estimate for Dish Network stands at $38, implying a premium of 10% to the market price.

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Notes:
  1. Dish Seeks $153 Million From ESPN Over Channel Contracts, Bloomberg, Feb 28 2013 [] []
  2. Dish Loses 3 of 4 Claims Against ESPN in Contract Dispute, Bloomberg, March 1, 2013 []
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