Charlie W. Ergen is no stranger to risky bets. The former professional blackjack player parlayed his early winnings into the second-largest U.S. satellite television service, Dish Network (DISH). Now the 58-year-old billionaire is making the biggest wager of his career. Ergen wants to transform Dish from a pay-TV provider to a wireless mobile video company that can take on both traditional cable rivals and online services such as Netflix (NFLX).
Dish has spent over $3 billion this year on three acquisitions of companies in bankruptcy—including the Blockbuster video chain—to combine video content and the valuable wireless spectrum that could be used to distribute programming to mobile devices like Apple’s iPad. Another Ergen-controlled company, set-top box maker EchoStar (SATS), spent $2 billion this past spring to buy satellite Internet service provider Hughes Communications. In September, Ergen rolled out a Blockbuster-branded movie-streaming service to Dish’s 14 million subscribers. His next addition could be Hulu, the online TV-service owned by News Corp. (NWSA), Walt Disney (DIS), and Comcast’s (CMCSA) NBC Universal. Dish has made a $1.9 billion offer for Hulu, outbidding rivals including Amazon (AMZN) and Yahoo! (YHOO), according to a person familiar with the bidding who was forbidden to speak on the record.
All this could allow Ergen to cobble together what every satellite operator covets: a viable broadband alternative to cable companies such as Time Warner Cable (TWC) or wireless giants like Verizon (VZ). “I don’t think we’re just a satellite TV company anymore,” says Joseph P. Clayton, who took over as Dish Chief Executive Officer in June so Ergen could focus on strategic vision as chairman. “Given the assets we’ve been accumulating, I don’t think it’s hard to see we’re moving in a different direction from simply pay-TV, which is a market that’s becoming increasingly saturated.”
While Ergen’s pursuit of Hulu is ongoing, he’s been busily assembling the infrastructure to deliver movies and TV far beyond Dish subscribers. Satellite broadband has struggled to compete with speeds of cable and fiber networks because of the distance of satellites from earth. But Dish’s pending deals to acquire satellite broadband providers DBSD North America and TerreStar Networks—which both own wireless spectrum—could help Dish cobble together a hybrid terrestrial-satellite network that would let the company offer mobile Internet service bundled with TV.
The company would still need a larger wireless network to reliably beam movies and TV shows directly to laptops, cell phones, and tablet computers, and to provide Net service. So Clayton says Dish may look at partnering with or acquiring a wireless company. That would allow Ergen to compete in what has become cable operators’ most profitable and fastest-growing business—providing broadband service.
The weak economy may be pushing Dish to transform itself more quickly than archrival DirecTV (DTV). Industry leader DirecTV added video customers last quarter while Dish lost 135,000, its second-largest quarterly decline in at least a decade. Dish offers less expensive video packages, attracting lower-income customers who are more likely to cancel service for financial reasons or buy lower-margin packages. The image of being “cheap, cheap, cheap” is one Clayton would like to avoid, he says. “I’m not sure that’s the right way to go as we move to a more advanced technical platform with our products,” he told analysts in August.
Dish has been tight-lipped about its ultimate plans. Yet its new Blockbuster Movie Pass may be a hint at how Dish wants to change. A Dish customer with Movie Pass can have satellite-TV, thousands of Blockbuster on-demand movies, access to video game and DVD rentals, and streaming online content for $39.99 a month for the first year. Dish customers can also share all that content among multiple mobile devices using technology developed by mobile video pioneer Sling Media, which Ergen bought in 2007.
Clayton says a Blockbuster online-streaming service will soon be available to non-Dish subscribers. Blockbuster gets its physical DVDs 28 days earlier than Netflix, a vestige of studio agreements intended to keep Blockbuster afloat during its pre-bankruptcy days. Ergen is now negotiating to get the digital rights a month earlier as well, though he’s unlikely to be given that preferential treatment, according to two Hollywood studio executives who declined to be named because the negotiations are private. There’s also concern among content providers that if Ergen buys Hulu, he’ll control so much distribution that he’ll have a stronger hand in future negotiations—including those with Hulu’s current owners.
“You look at all of the bandwidth we own with our satellite capacity, and now having IP-connected set-top boxes, our ability to offer content to a consumer leaning back in his living room is pretty powerful,” says Blockbuster President Michael Kelly, who has worked for Ergen for nearly a decade at Dish and EchoStar.
Adding Hulu would give Ergen the rights to more content and 1 million paying subscribers to whom he could stream movies and TV shows, as well as additional ad revenue. Dish is also converting 150 Blockbuster brick-and-mortar stores to hybrid shops where customers can sign up for Dish packages and rent a DVD. “What Charlie’s done is put together content and distribution,” says media investment banker Peter M. Hoffman, a partner at GHL. “Netflix still has to rely on someone else’s distribution to deliver its content. If I was Netflix, I’d be a little worried.”