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Analysis: Dish Chairman Says Blockbuster Success Uncertain

8 Oct, 2012 By: Erik Gruenwedel

Satellite TV operator and Gannett Broadcasting reach retransmission deal

Dish Network, which acquired bankrupt Blockbuster for its salvage cost last year, has long stated that it envisions the rental icon and its 900 stores to break even as it leverages the brand as a conduit for digital distribution of entertainment.

That digital strategy now appears in jeopardy, according to recent comments made by Dish chairman Charlie Ergen. In an Oct. 3 interview with Bloomberg, Ergen said ongoing delays by the Federal Communications Commission regarding how Dish can use its wireless spectrum has put plans to deliver movie rental streaming to connected devices on the backburner. 

“I don’t think Blockbuster is going to be a mistake, but it’s unclear if that’s going to be a transformative decision,” Ergen told Bloomberg.

While media outlets have jumped on the executive’s statements as evidence of another nail in the coffin of the video store business model, Ergen is actually interested in a far larger issue: wireless spectrum and how the snails-pace of federal regulation regarding how Dish can integrate it is stymieing its business opportunitites.

The FCC has already approved Dish’s $3 billion acquisition of 40 MHz of spectrum from satellite companies DBSD and TerreStar but did not OK the satellite TV operator to use the license to roll out a non-satellite-based wireless network.

Ergen, who is asked about the status of the spectrum issue every 90 days during the company’s fiscal calls, expressed frustration about it in the company’s Aug. 8 fiscal call regarding the FCC’s delayed in-action.

“It's frustratingly slow, but we're not the only people that have had government be slow,” Ergen said during the call. “I think that the FCC will … [after] they've taken a good hard look at it … strategically have to decide kind of where they want the wireless industry in the United States.”

While Blockbuster reported an operating loss of $13 million in the most recent quarter, it posted a first-quarter operating profit of $13.9 million and a combined $4.3 million operating profit in the remaining months of 2011 after Dish acquired the chain.

Indeed, Dish attributed nearly $40 million of its year-over-year Q2 profit decline to costs associated with subscriber acquisitions. Half of the increase was driven by higher net additions and the other half was driven by advertising associated with the launch of the Hopper DVR and its controversial AutoHop ad-skipping feature.

Dish CEO Joseph Clayton in August said that given all the moving parts, sales seasonality and the increased in-store investment at Blockbuster, it wasn’t surprising the chain reported an operating loss. It has also shuttered 500 stores bringing the total store count to 900. In 2004 when Viacom spun off Blockbuster, it was operating 9,000 stores worldwide.

“We are optimistic that the strategic changes that we have recently implemented will put us in a position for improvement,” Clayton said.

Separately, Dish said it signed a long-term agreement allowing it continued retransmission of Gannett’s stations. The statement made no mention regarding AutoHop, the controversial ad-skipping feature on Dish’s Hopper DVR that has resulted in numerous litigation filed against Dish by media companies.

The satellite TV operator earlier said it had been unable to reach an agreement with Gannett after the broadcaster made it clear it wanted Dish to pay a significant penalty for allowing its subscribers access to AutoHop. Dish says consumers have had the right to skip commercials and is simply providing consumers with the choice to watch what they want, when they want.

Dish said it agreed to pay a significant increase in fees to continue to carry Gannett’s local stations, up more than 200%, the same as its closest direct competitor. But Gannett’s apparent aim to extract additional fees for AutoHop was non-negotiable.

“On this issue, we are standing shoulder to shoulder with viewers,” Dish said in a statement.

Gannett’s markets include Denver, Atlanta and Washington.

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