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Sep 30, 2003
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• EchoStar Alleges Extortion in Talks With Viacom1

• EchoStar Can't Carry Shows From Viacom2

Viacom Signals It May Want
To Buy a Cable System

Redstone Surprise Comes
Amid Feud With Echostar;
Blackout Hits Sponge Bob

In what would be a major shift in strategy, Viacom Inc. Chief Executive Sumner Redstone signaled that the company might seek to buy a cable-TV system.

The remarks come just as a nasty spat between Viacom and satellite broadcaster EchoStar Communications Corp. has boiled over. In a contract dispute, more than nine million subscribers to EchoStar's Dish satellite-TV network lost access to several Viacom cable channels Tuesday, including MTV and Nickelodeon, and 1.6 million of them lost CBS.

Mr. Redstone didn't suggest that his company would move soon on any acquisition, and he made it clear that he wasn't interested in acquiring EchoStar. But his remarks highlight the way tensions have sharpened between companies that produce programming, such as Viacom, and those that distribute it. In this case, the argument is over how much EchoStar should pay Viacom for its programming.

Viacom has long argued that its stable of TV channels was so popular that the company didn't need to own distribution platforms in order to bring them to customers. Comcast Corp.'s bid for Walt Disney Co. last month highlights the other view. Comcast is the biggest cable-TV operator and Disney owns both the ABC network and cable channels such as ESPN. Time Warner Inc. already owns both production entities and cable operations; News Corp., parent of the Fox network, recently acquired control of DirecTV, a satellite-TV operator.

Tuesday night Viacom and EchoStar were still locked in their dispute, and CBS viewers in the 16 large cities where Viacom owns stations are faced with the prospect of missing the network's highly popular NCAA basketball tournament, which begins next week. All Dish network subscribers will be without most of Viacom's cable channels, including the No. 1 channel, Nickelodeon.

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"There are going to be a lot of disappointed people who can't find 'SpongeBob SquarePants,' " said Mark Rosenthal, president and chief operating officer of Viacom's MTV Networks.

Tuesday, EchoStar Chairman Charlie Ergen suggested a settlement with Viacom may come quickly. Despite the escalating rhetoric, "we are pretty close in terms of an agreement in principle," he said. "It can happen in an hour, or it can happen in a month," Mr. Ergen said, adding that he couldn't make a better prediction.

Mr. Redstone's comments Monday night, made to investors at a Florida conference and available through a Webcast, also appeared to be a thinly veiled swipe at the management of Viacom President Mel Karmazin, with whom he has long feuded. Mr. Karmazin has been vocal in ruling out the acquisition of any distribution venues such as cable systems.

Mr. Redstone also promised that the company would be more aggressive about funding its creative businesses such as film and television; Mr. Karmazin is known for setting tough budget targets for divisions.

Just a year ago, Mr. Redstone renewed Mr. Karmazin's contract -- under pressure from Wall Street, where Mr. Karmazin is popular -- but on terms that gave Mr. Redstone enhanced oversight at the company. Lately, Viacom stock has been stagnant, hurt by poor performance in its radio business, which is closely associated with Mr. Karmazin. Investors also have questioned the long-term growth prospects of some of Viacom's businesses, as worries about the impact of new technologies on TV advertising have surfaced. In an interview Tuesday, Mr. Redstone strongly denied he was criticizing Mr. Karmazin, adding that past management decisions and the current change in direction reflect the shared views of the two executives. A Viacom spokesman said Mr. Karmazin declined to comment.

As recently as last month, Mr. Karmazin said Viacom's board had considered whether the company needed to get into distribution when the AT&T cable systems and DirecTV were on the market. "We felt there was really no reason for our company to own distribution," Mr. Karmazin said in an interview at the time.

On Monday, however, Mr. Redstone said that while Viacom didn't "need distribution for defensive purposes," the time might come "where we could decide ... for the future growth of Viacom we could add more distribution, for example, cable systems." Later, asked by an investor to elaborate, he said nothing was "happening today."

Mr. Redstone said he wasn't interested in buying EchoStar. "I don't want to be No. 2," he said, noting that the satellite-TV business is now dominated by News Corp. Chairman Rupert Murdoch, who recently bought a controlling interest in EchoStar's rival DirecTV.

In the absence of its own cable or satellite systems, Viacom finds itself in tough negotiations over what it can charge an operator such as EchoStar. This tiff is particularly hostile: EchoStar posted Mr. Karmazin's home phone number on its Web site last weekend in response to Viacom's running a scroll on its channels telling viewers that EchoStar was going to take its channels away from subscribers. Meanwhile, CBS and Viacom had to set up call centers to field complaints, and they have been suggesting to callers that they consider subscribing to DirecTV or their local cable operator.

If the dispute isn't resolved soon, EchoStar could face defections. Dish subscriber Robert Pepe of Old Bridge, N.J., says he is prepared to jump ship. "If they don't fix this, I will go to DirecTV," he said, adding that while he can get by without CBS, his kids can't live without Nickelodeon.

Four years ago, Time Warner Inc. dropped Walt Disney Co.'s ABC stations from its cable systems during a similar feud. Speaking at the same Florida conference as Mr. Redstone, Disney President Robert Iger said that it is "unbelievably dangerous" for EchoStar to "deprive its customers of the content that Viacom has." In the dispute between Disney and Time Warner, he said, "Time Warner learned this the hard way. ... The pressure on them was so great they folded in a day -- one day. That's from consumers, politicians, investors, you name it. Dish is going to see a similar reaction."

These feuds are usually centered on how programmers such as Viacom negotiate with cable and satellite companies. When Disney and Time Warner were having their bout, it was over Disney's push to have Time Warner carry new cable networks in return for so-called retransmission rights for its ABC stations. In this case, EchoStar is taking issue with Viacom's attempt to bundle several channels together. Specifically, in return for carrying Viacom's local CBS stations, it wants EchoStar to agree to also carry new channels such as Nicktoons.

Such deal making has become commonplace in the industry, although many cable operators and EchoStar argue that these tactics amount to extortion. EchoStar executives say they have high hopes for a pending antitrust lawsuit the company has filed against Viacom over the bundling issue.

But Howard Shelanski, professor of law at Berkeley University and a former chief economist at the Federal Communications Commission, says EchoStar will have a tough time making its case. "All Viacom is doing is exercising their market power over a product they own. ... Antitrust law is quite clear that there is nothing illegal about exercising justly earned market power," he said.

Some industry officials and analysts remain convinced this will be only a short-term feud. But unlike what happened earlier between Disney and Time Warner, this time Mr. Ergen, EchoStar's feisty and unpredictable chairman, seems eager to take personal responsibility. "We're willing to pay for retransmission rights, but Viacom is holding the public airwaves hostage" by trying to extract further concessions, he said.

Mr. Rosenthal, the MTV Networks president, said Mr. Ergen has been spouting "gross distortions" and "inaccuracies." He says the increases Viacom is seeking for its channels amounts to an additional six cents a month per subscriber, which is less than 5% of what EchoStar generates from the average customer.

"We would still like to reach a deal, but the ball is firmly in EchoStar's court," Mr. Rosenthal said.

Write to Joe Flint at joe.flint@wsj.com3, Martin Peers at martin.peers@wsj.com4 and Andy Pasztor at andy.pasztor@wsj.com5

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