Sunday, May 26, 2013

Charlie Ergen, patriot, scoundrel, thief: some comments on the Softbank vs DISH battle for Sprint


It seems fitting that the best case that Charlie Ergen and DISH can muster for their bid for Sprint is false patriotism. Softbank they say will be a national security risk. Fitting because Samuel Johnson warned us almost 240 years ago that patriotism is the last refuge of the scoundrel - and Charlie Ergen is a scoundrel.

The misdirection from DISH was from the beginning. Here was the pitch for the DISH offer from the beginning:




The case for the DISH's offer is that it offers $4.76 per Sprint share in cash plus 32 percent of the surviving company. Softbank by contrast offers $4.03 per share in cash plus only 30 percent of the surviving company. 

More cash and a larger proportion of the surviving company - what is not to like about that?

Calling Charlie's bluff on this - plenty actually. You see the surviving company in the Softbank case is Sprint after Softbank has injected $8 billion into it. It is a highly credible competitor for AT&T or Verizon. 

And the surviving company in Charlie Ergen's example is a highly levered beast called DISH-Sprint. DISH Sprint will be bereft of cash and loaded with debt because the cash part of the offer comes largely from leverage.

So it is worth understanding what DISH is.

DISH is a second-tier satellite provider that lost the battle for quality subscribers to DirecTV. Charlie always had an inferior offer based on low cost - when DirecTV had The Sunday Ticket, and was first to market with high definition and other quality-improving features. The Sunday Ticket was a clear - albeit expensive differentiation - it allowed you to watch your home team NFL game even when you did not live in your home town - a great offer in a country with as much upper-income job mobility as the USA. That combined with relatively poor service and lack-of-speed with high-definition meant that DISH found itself caught in a low average revenue per user (ARPU), low growth world. 

Until Charlie hit upon a new business model. The Hopper.

The Hopper is a standard personal video recorder (PVR) attached to the satellite receiver - however it records live the whole of prime time television every night. It then allows you to watch the TV with the advertisements removed for you. To quote DISH's website:

Hate commercials? DISH created commercial-free TV so you can save an hour each night! Now you can instantly skip commercials in recorded primetime TV. Only DISH gives you ad-free TV with the Hopper®.

What an offer - the TV you were going to watch anyway without those pesky little adverts. 

But there is of course a problem: the TV networks did not agree to this. Indeed this is as much a threat to the business of commercial TV (which is still advertising supported) as Napster was to the music business. It is thievery, nothing more. And all four networks are suing DISH for this. You can read the story in The Hollywood Reporter if you wish under the unsurprising title of Charlie Ergen is the most hated man in Hollywood.

The Hopper has done wondrous things for DISH. Subscriber numbers are growing sharply after stagnation. The question of course with the Hopper is how does it end? Does it end with Charlie having to stop it after lawsuits, or some legislative change or the death of commercial TV all up. Either way it looks to be an unsustainable advantage built on an unethical and possibly illegal business model.

It is small wonder Charlie is in the game of diversion. He claims his offer is superior but he is offering crappy DISH stock and is diverting with Patriotism in the time honored method of scoundrels and thieves.

And he is doing it for a reason. He doesn't want anyone looking at DISH (and hence DISH-Sprint) too hard. Because unethical and arguably illegal businesses should trade at a discount - and - dear Sprint shareholders - you should not accept stock in one in exchange for your perfectly good phone company.




John

PS. Disclosures - Bronte owns both Sprint and Softbank. I have not communicated with anyone from Softbank - but Masa Son, if I am in Tokyo you owe me a sake. 

Our big holding is in Softbank.

9 comments:

Anonymous said...

John, agree with most of this. The "thief" bit though seems a long bow. You agree, I assume, that I am free to record prime time on my DVR? And also, that I am free to skip the ads? And I would also be free to hire someone for $6/hr (labor is cheap here) to only record the shows and stop recording when the ads came on? And I must therefore be free to write a computer program that does the same thing for me? So what's the difference if DISH does that for me? They're just facilitating something that I can already do. It's exactly the Aereo situation -- and as you might have noticed, Aereo has won all of its litigation (so far...)

Anonymous said...

Charlie is a legend, and the most pragmatic of CEOs in a fast changing tv industry. I love that hes trying to push the industry in the right direction, this is best for the consumer. But as for the DISH equity thats a completely different story.

http://allthingsd.com/video/?video_id=BD372489-2A0F-4F73-A174-51864BD49D6B

Anonymous said...

So, with my TiVo and DVR, it takes me 5 seconds to skip the commercial, instead of 1 second with Hopper. I completely and utterly fail to see the difference.

Agree that the SoftBank offer is superior though.

Anonymous said...

John, please also comment on the chuck schumer bit. Reuters explains his "extreme caution" over softbank because of chinese cyberattackers, and includes this gem:

"Matt House, a spokesman for Schumer, confirmed the senator had discussed the issue with Jessica Straus, his former campaign finance director who now works for Dish as its government relations manager.

But Schumer decided he had concerns about the SoftBank-Sprint deal before his conversation with Straus, House said."

Cretan said...

“If you are in the intelligence business ... the one thing you would love to do is run the telecommunications infrastructure in another country,”

Former Director of National Intelligence Mike McConnell during a House hearing on cybersecurity on Tuesday. DNI heads the sixteen-member Intelligence Community which includes CIA, DIA and NSA

---------------

cybercrime battle: New Yorker, May 20,1013.

General Keith Alexander, who is the head of the N.S.A and or the U.S. Cuber Command, has called the loss of American industrial secrets and intellectual property to cyber espionage "the greatest transfer of wealth in history".

------------------

Sprint operates special, secure networks, Peerless IP, for the U.S. Government
Sprint provides high-level ‘peerless IP’ networking services, allowing enterprises and governmental entities, including defense and intelligence organizations, to deliver secure, private national networking separate from the public Internet.

-----------

Son is not an investment banker. Son is a major player in Asia telecoms, where he owns numerous telecommunications companies.

The networks of those companies will be interconnected with US Sprint.

This matters for national security as well as about the country's wealth.

This is not like leaving the back door open.

It amounts to handing over the keys to the front door, the security code for the alarm and the key and the code for the vault.

Ben said...

Softbank's takedown of DISH's offer is one of the most epic takedowns I've seen in some time. Masa is an incredible CEO and his calling out DISH was not only correct but hilarious. I'm a huge Softbank holder myself and find the DISH deal and noise to be absurd. Good post.

CurmudgeonlyTroll said...

Internet video, over-the-top, sharing/piracy, VPNs eliminating regional boundaries ... are going to kill commercial TV like they killed commercial music, just a matter of time.

Give Ergen credit for seeing the writing on the wall, trying to take advantage and not swim against the tide.

bjdubbs said...

Lessons in patriotism from the British. It's almost as if the US is the imperial capital and everybody feels free to opine on US politics and policy as if it were their own country.

Anonymous said...

Charlie Ergen is not only a scoundrelbut is a thief also. How? It is corporate greed. He stole the DVR Technology from TIVO and now, he is paying the penalty.He fired the most competent and ethical people like Soraya Cartwright and Bobby Hernandez,But, he is running Dishnetwrk with incompetent and unethical people like Nileen, Trudy Utt and Rick Mason. Dishnetwork has become the worst employer in Colorado,Finally it is good that he did nto get the Sprint deal,

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