I'll Take a Bundle of This and Bushel of That

If you've been living in a cave, have only terrestrial TV reception or like us just don't watch commercial TV you may have missed the news that EchoStar, the friendly company† that sells satellite TV under the brand name "Dish Network," is feuding with Viacom over channel bundling.

The two companies have been in negotiations for several months over Viacom's insistence that Dish add several of their less popular stations (BET and MTV) to Dish's "basic" package, thus requiring an increase in monthly fees to the consumer. What does Viacom have that's so popular they're trying to bundle BET and MTV to? Try CBS, Comedy Central and several children's stations like Nickelodeon. Unable to come to an agreement Viacom has cut Dish off and those stations are now blank (not really, they direct you to the Dish website for an explanation). Viacom did not go out quietly. Over the weekend they began broadcasting a black bar over the bottom of their stations telling Echostar customers about their impending doom and urging them to call Dish and demand Dish cave in. (Dish counter responded by covering the black bar with one of their own — it's good to be the last guy to broadcast). Charlie Ergen, Dish's CEO, is standing up to Viacom and refusing to sign the new deal. Why do you care?

Bundling — to be precise, illegal bundling, is the practice of forcing customers to buy unrelated X to get Y. In other words, forcing your customer to buy an an orange to get lettuce. Illegal bundling differs from legal bundling where is necessary to make a functional product. For example, your television came with a picture tube. Dish is accusing Viacom of the former — illegal bundling. In this case, to get CBS and other customer-popular stations Viacom is trying to force Dish to include (and charge customers for) less popular fare (BET and MTV). Illegal bundling was a key complaint in the US v. IBM anti-trust suit during the 70s. Why's it bad?

Have you ever tried to buy just the cable/satellite channels you want. "I'll take three major networks, one public tv station, two children channels, a BBC and a couple of orders of classic movie channels, please." "Oh, you want the UNIVERSAL everything package — that'll be $79.95/month before tax." "Gee, I thought I could maybe pay for the 10 or 11 channels I like for maybe $15/month." "<snicker>You're new here, aren't you?"

It's illegal for car manufacturer's to require you to purchase their after-market part to keep you warranty. You can serve jail time for colluding with your competitor to fix prices. You'll win an all expense-paid trip to the pokey for trading on insider information. But you want to force customers to pay for MTV to get CBS and Nickelodeon? No problem. Pass Go, collect $200 million dollars and and get a nice fat bonus check.

Boil it down and bundling is anti-competitive, inefficient and bad for customers because it enables — in this case — media-content providers to force out the little guys and offer to the market sub-par fare. Most cable and satellite companies have an entry-level package which represents 35% - 66% of the total fee paid by customers — even those who opt for higher-tier packages. The large media-content providers can snap-up all that "viewer real estate" by forcing the delivery companies to fill out all the channel slots in the basic packages with their content — regardless how popular the channels are. All you need are a couple of big-draw channels that the public demands to have, say like CBS or a channel with exclusive content for say football, and voíla, instant barrel over which to drag the delivery companies and force them to buy your mediocre crap. Now interesting channels like BBC America are pushed into other tiers and meanwhile you're collecting a larger percentage of the base package fee. At Dish, for example, $29.99/month will buy you the basic 60 channels plus local stations if you live in a market where they carry your local channels. The next 60 stations only cost another $10/month. Dish's biggest, most expensive package is $79.95/month. As a content provider you want to have as-large-a-share of the base package as you can get. How do you do that given that nobody can consistently churn out hit-after-hit in every viewing segment? You bundle — and you bundle big. The stakes are high and the pay out is higher.

So, with that in mind I'm very much in favor of and support Dish Network's refusal to sign the new agreement. Now, let's make no mistake here. Dish isn't doing this completely out of selfless love for their customers. Customers are gonna pay that $29.99/month regardless whether BET and MTV are in the line up or whether it's some other provider. But, if you're Dish and can get CBS without MTV then you can sign up some small-time media-content providers who charges less than Viacom and pocket the difference as profit that can translate to increased stock price. Or, you can use the extra savings to sign up other popular fare and keep your prices low to grow your market share at the expense of your competition. So let's not be naïve here. Nevertheless. I am supporting Dish in their fight. Well, morally that is. Read my letter to Dish's CEO below where I explain why I can only offer moral support despite my ardent desire to support them financially as well.

Dear Charlie,
I read about your company's stalemate with Viacom over the channel bundling. I totally support Dish Network's position and almost subscribed just now so I could add financial support to the cause. The equipment package was great; the monthly price was acceptable. Everything was a go -- except.... The $29.99/month gives me maybe 10 stations my family is interested in. Give us true a la carte pricing for all your stations with PPV options and I'm a Dish customer. I know you can't because of bundling deals like the one Viacom is trying to shove down your throat. The problem for your company is our total unwillingness to pay $30/month to get our local stations and 3 or 4 other stations we're interested in. We definitely won't pay $40/month just to add in BBC America (the one station we want most in addition to the locals). Sadly I have to tell you our $30/month still goes to Blockbuster and the local library. It's true we miss out on some TV shows but then we watch what we want to watch.

Maybe someday in the future Dish will be able to offer something we're interested in.

Go Dish!

Aaron

P.S. Please don't sign us up for any email notifications or solicitations by your company, regardless how infrequent they may be.

Notice: Sending this letter in no way grants any recipient (intended or consequential) permission to use or reprint the letter in any public forum. Any such use requires written permission from the sender. However, nothing in this notice is intended to deprive the recipient of their fair-use rights.‡

If you'd like to send Charlie Ergen your thoughts write him here.

†As opposed to the not-so-friendly company that also sells satellite TV.
‡What's this all about? I may support Dish Network in their fight against Viacom but I have no idea what their privacy policy is or even whether they have one. This just might keep them from spamming me or abusing my goodwill.

Posted: Wed - March 10, 2004 at 12:42 AM

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I'll Take a Bundle of This and Bushel of That

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