Broadband Cable Association of Pennsylvania


October 5, 2012

Billionaire Charlie Ergen is giving up on his plan to turn the once-mighty Blockbuster LLC video- store chain into a Netflix Inc. competitor and gadget retailer. When Ergen's Dish Network Corp. acquired Blockbuster out of bankruptcy in April 2011, Ergen planned to use the stores to sell Dish mobile devices that could be used to stream Blockbuster movies. The plans broke down when U.S. regulators didn't immediately approve a waiver allowing Dish to use its satellite spectrum for terrestrial data and voice transmission. "You make a lot of mistakes in business," Ergen, Dish's founder and chairman, said in an Oct. 3 interview. "I don't think Blockbuster is going to be a mistake, but it's unclear if that's going to be a transformative decision."

Dish has begun the process of closing stores that no longer make strategic sense, a plan that will allow Dish to turn a profit on the $320 million acquisition, Ergen said. Some Blockbuster DVD-rental stores can still make money in rural regions, he said. About 900 U.S. stores remained as of August, a fraction of the thousands Blockbuster once operated. Ergen's plans for Blockbuster turned sour when the regulatory approval process for his radio-wave licenses took longer than expected. Ergen said he believed the government would approve Dish's plan in 2011 as it had done for Philip Falcone's LightSquared Inc., which was also attempting to build a new long-term evolution network.

The government later denied Falcone use of his spectrum due to global-positioning systems interference concerns, causing LightSquared to file for bankruptcy. To avoid a similar outcome with Dish, the government slowed down the approval process for the Englewood, Colorado-based company, which is still waiting for the results of the Federal Communications Commission's rulemaking. Ergen's airwaves, which Dish agreed last year to purchase from DBSD North America Inc. and TerreStar Networks Inc. for about $3 billion, require new handset devices with a chip that links the satellite spectrum to terrestrial towers. The government's delay has caused Ergen to change his mind about selling those products in Blockbuster stores. "When your lease runs out on the stores, you can't re-up because you can't make enough money from just selling DVDs," Ergen said.

When Dish acquired Blockbuster last year, the company had about $100 million in cash on the balance sheet. Shuttering and selling all 1,700 Blockbuster stores that Dish purchased would make Ergen's company about $300 million, turning Dish a profit without using the brand for anything, Ergen said. Dish announced plans in February to shutter 500 stores, bringing its U.S. total to about 900 through August. "There was very little risk in buying," Ergen said. "Worst case we break even or make a little bit of money." Dish rose 1.1 percent to $32.27 yesterday in New York. It has climbed 30 percent in the past year. Blockbuster was once so dominant in the home-video market that it was sued by independent video retailers, who claimed in a 2001 lawsuit that the company's revenue-sharing agreements with movie studios hurt competition. The suit was later dismissed. By the time Viacom Inc. spun off Blockbuster in 2004, Netflix was eating into the retailer's customer base with its postal DVD rentals. Blockbuster was operating about 9,000 stores worldwide then. It filed for bankruptcy protection in September 2010.

Dish planned to entice consumers to buy its wireless services by streaming Blockbuster movies on mobile devices. Without the wireless network, a nationwide streaming service would function a lot like Netflix, except Blockbuster would be starting from scratch against a big incumbent, Ergen said. Netflix has 24 million U.S. streaming-video customers. Content providers have caught on to Netflix's business model, Ergen said, after years of struggling to figure it out. Netflix pays a flat fee for the rights to stream library content. When the Los Gatos, California-company was growing rapidly, Netflix was profitable because the company would pay a fee based on the customers it had at the time, then make money by recruiting millions more customers, Ergen said. "Netflix at first paid for 5 million customers and they got 25 million," Ergen said. "But now people are saying, 'OK, you're going to get 30 million customers, so you're going to pay for 30.' If Netflix can get 40 or 50 million, they'll be fine. But if they don't get to 30, they're probably going to go pfft."

Netflix shares have fallen 42 percent in the past 12 months. Analysts predict Netflix will lose money this quarter and next, according to data compiled by Bloomberg. Joris Evers, a Netflix spokesman, declined to comment. Dish no longer has plans to use Blockbuster as a nationwide video streaming or DVD-by-mail service, Ergen said. Dish also considered a deal with Coinstar Inc.'s Redbox, allowing customers to rent a movie from a Redbox kiosk and return it to a Blockbuster store, Ergen said. Those plans deteriorated when Verizon Communications Inc. announced its partnership with Coinstar earlier this year.

Dish has combined the Blockbuster brand with its own offerings by giving customers a "Blockbuster @Home" option, formerly Blockbuster Movie Pass, which allows subscribers to rent DVDs and video games by mail, stream more than 25,000 movies to personal computers and watch more than 3,000 titles at home on television. The package costs $10 a month and is free for the first three months to new customers. The company has other plans for Blockbuster on which Ergen declined to comment. Dish has spent "a lot of time" talking with cable networks about an Internet streaming service for live programming, although the service is probably still "years away," Ergen said. "Worst case, we'll take our money after having wasted some time, not much money, and life goes on," Ergen said. Bloomberg

About 100 Penn students and professors took a break from classes Thursday to delve deep into the future of wireless communications. Federal Communications Commission Chair Julius Genachowski spoke in Huntsman Hall about his agency's work in mobile communications. The event was organized by Wharton professor Kevin Werbach and second-year MBA student Shomik Dutta. Both Werbach and Dutta have previously worked with Genachowski on FCC initiatives. The FCC is a large federal agency devoted to the regulation of the telecommunications industry. "We are in a global bandwidth race," Genachowski told the audience. "And much like the space race in the 20th century, success in this race will ... go a long way toward determining who leads the global economy in the 21st century."

He identified the key to winning the race as expanding national coverage and access to a network that is "fast, high-capacity and ubiquitous," providing the bandwidth that people need when and where they need it. However, Genachowski noted that this "strategic bandwidth advantage" actually creates its own obstacle - the "spectrum crunch." The spectrum crunch, he explained, refers to the looming possibility that the available space for mobile data in the country will one day run out. To address this, the FCC implemented "incentive auctioning" - a process by which under-utilized broadband is sold off to companies that will make more efficient use of it, freeing up data space.

Genachowski's entire career so far has been marked by similarly bold innovations, which the event organizers discussed in their introductions Thursday. Since being appointed FCC chair in 2009 by President Barack Obama, his old Harvard Law School friend, Genachowski has pursued programs and initiatives aimed at opening the communications market. Dutta believes that his appointment to the FCC serves a testament to Obama's ability to attract "some of the brightest stars from the private sector." Before he came to the FCC, Genachowski worked in the private sector at organizations like internet company InterActiveCorp, private equity firm General Atlantic and technology incubator LaunchBox Digital, which he co-founded.

For some, the event's turnout was a pleasant surprise, given the highly technical nature of the topic. "A lot of the issues being discussed here are technical and arcane," Wharton professor Peter Fader said. "To see students here and engaged - it's a really good sign." Indeed, for many students, the event marked their first-ever encounter with the material. "It was really informative ... [even though] I don't really know anything about spectrum," second-year MBA student Erik Philipp said. "It seems like they're doing a very good job of managing the spectrum in a way that gives healthy growth in that area for the industry." "You don't really often hear about how the government is being innovative ... especially in technology policy," Wharton freshman Marisa Rackson added. But the FCC is "still taking the initiative to do [these things], and I think that's really interesting - really positive." Daily Pennsylvanian (University of Pennsylvania student newspaper)

The long slog of election season can be depressing - the pandering, the nasty attack ads, Jim Lehrer bewildered as candidates brush off his debate moderation. 1812 Productions has the cure. "This Is The Week That Is: The Election Special" opened Wednesday at Plays & Players Theatre (Philadelphia). A cast of seven sing, dance and joke their way through a dead-on parody of stiff presidential candidates trying to relate to everyman America, fatuous cable-news pundits eager to coin the next hot buzzword and infuriating fact-checking that leaves voters longing for better choices.

"You know, a lot of people are saying this election reminds them of the Phillies: A lot more exciting four years ago," goes one of the opening jokes.

The show strives to be topical, with local flavor. The controversy about voter-ID legislation gets more than one send-up, including a scene in which a dead ringer for Betsy Ross asks for identification at a polling place in the first election after the Revolutionary War. She explains the need, citing rampant fraud in the Second Continental Congress. "There was voter fraud in the Second Continental Congress?" an astonished voter in 18th-century garb asks. "No, but imagine if there had been," she replies. "You are a conspiracy theorist," he declares. "Oh, don't make this about me," she says dismissively. "You British are all the same." Philadelphia Daily News