Walt Disney’s Cable Battle Intensifies

EchoStar Communications Corp. returned fire Thursday in a nasty contract dispute with Walt Disney Co. that could have ramifications for EchoStar’s proposed merger with DirecTV.

The two companies are locked in a legal battle over a contract under which EchoStar, the nation’s second-largest satellite-TV provider, delivers Disney’s ABC Family channel to 6.5 million subscribers.

The legal sparring provides a rare glimpse of the hardball tactics used by programmers such as Disney and pay-TV distributors such as EchoStar to determine the rates viewers pay for channels. EchoStar has contended that its subscribers are paying too much for ABC Family, given the channel’s poor ratings.

The situation also could be a factor in the sensitive regulatory review of EchoStar’s bid to become the nation’s only satellite provider by acquiring DirecTV parent Hughes Electronics Corp.

In court papers filed Thursday, EchoStar contends that Disney threatened to lobby against the satellite company’s bid for DirecTV if EchoStar failed to reach an agreement to carry ABC Family.

Disney knows firsthand how rewarding fights in Washington can be. Disney won a huge victory last year, after Time Warner failed to settle a contract dispute over delivery of Disney’s ABC network to its cable customers. Regulators went on the warpath when Time Warner dropped the channel, cutting off thousands of viewers. Disney not only got handsome rate increases, but also managed to delay Time Warner’s proposed acquisition by America Online by several months.

The current spat between EchoStar and Disney began this fall when the satellite provider notified Disney it would drop ABC Family and ESPN Classic at the end of December.

In mid-December, Disney filed suit, asking a U.S. District Court to immediately enjoin EchoStar from dropping the ABC Family channel, which Disney bought in November as part of a $5.2-billion deal with News Corp.

Disney challenged EchoStar’s use of a contract provision that allows the satellite provider to drop the channel in the event of a change in its ownership. Disney argues that there was not a change of ownership because the channel’s parent company remains intact even after the acquisition from News Corp.

In court papers filed Thursday, EchoStar responded that the sale was a clear change of ownership and that it needed to drop certain channels to accommodate 250 others that it is required by law to begin carrying in January.

Satellite providers are required next month to carry all local broadcast channels in a market to prevent them from cherry picking. EchoStar has argued in Washington that the nation’s two satellite companies must be allowed to merge to accommodate such an expensive demand.

In its court filings, EchoStar said ABC Family was vulnerable to being dropped because of its declining ratings and lack of popularity.

Indeed, analysts say, EchoStar’s claims underscore the challenge Disney faces in doubling the cash flow of the channel within two years as it promised Wall Street when it paid News Corp. a record price for the channel, then called Fox Family Worldwide.

Though few channels are dropped by cable or satellite operators because of the potential backlash from customers, analysts say ABC Family is prone to disruptions for several reasons.

Contracts with seven of the channel’s nine major distributors will have expired by the end of the year, and many of these distributors are considering dropping ABC Family, which reaches about 80 million homes.

Many cable and satellite operators are looking for retribution after years of unrelenting rate increases that Disney has demanded for ESPN and its other channels. ESPN has pushed through 20% annual fee increases for the last two years--rate hikes that cable operators blame for escalating customer bills.

“There is a bitter taste in the mouths of cable operators from having to hand over such huge increases to ESPN, which is a must-have channel,” said Derek Baine, an analyst at Kagan World Media in Carmel. “Disney would be in a better position if contracts were coming up for ESPN, but they are not. Disney is in a very vulnerable situation.”

Disney has promised to reinvigorate ABC Family next month with new programs, some of them from its ABC network.

But cable and satellite operators object to paying big fees for programs that viewers can see on ABC for free.

In the court papers, Michael Schwimmer, head of programming for EchoStar, said Disney used threats in mid-December to compel EchoStar to carry ABC Family.

He said Disney senior vice president Peter Murphy told him that his company had “its weapons” and was prepared to “march on Washington, D.C.,” in opposition to the DirecTV deal if the two companies failed to reach a deal for delivery of ABC Family.

According to EchoStar’s filing, the dispute escalated to the point that Disney President Bob Iger sent an e-mail to EchoStar Chairman Charlie Ergen invoking the Time Warner battle. Disney on Thursday dismissed the claims.

“Schwimmer’s declaration materially misrepresents his conversations with Peter Murphy,” Disney spokeswoman Chris Castro said. “Mr. Iger and Disney made a great effort to resolve this contractual dispute before finally having to seek relief from the court.”