ECHOSTAR DELAYS FINANCIALS, DISCUSSES VIACOM INSTEAD

The SEC told EchoStar the company over-accrued $17 million and $9 million in 2001 and 2002, respectively, for the replacement of obsolete smart cards. “The SEC concluded that EchoStar’s accrual to replace the smart cards in satellite receivers sold to and owned by consumers was appropriate. However, the SEC has determined that EchoStar should not have accrued a liability for smart cards in satellite receivers owned by EchoStar and leased to customers,” the company said.

CFO Michael McDonnell said the SEC was notified by the Public Company Accounting Oversight Board during a review of randomly selected companies under each of the 4 public accounting firms. Although the SEC was asking the company to restate its 2001 results, he said, the new statement would have “no impact on previous free cash flow results, but it would reduce losses.” McDonnell said the company expected to continue its discussions with the SEC in a few days and hoped to have the most recent 10K filed by March 30. EchoStar expects to hold another call for its 4th-quarter results closer to that time.

Meanwhile, a joint statement released by EchoStar and Viacom confirmed the companies had reached “a long-term, multi-channel agreement” early Thurs. morning. The agreement, terms unannounced, included Viacom’s owned and operated CBS stations in 16 markets and Comedy Central, MTV, MTV2, Nickelodeon, Noggin, Gas, VH1, VH1 Classic, MTV Espanol and BET. EchoStar also agreed to launch Nicktoons on its Americas Top 180 package and extended the terms of its agreements for CBS HD (east and west), Spike TV, Country Music TV, and TV Land. All litigation between the companies has also been settled, they said.

While Ergen wouldn’t confirm the price increase of the deal, he said he wouldn’t dispute the 6 cents increase Viacom had touted earlier this week (CD March 11 p16): “When that was mentioned, it was acceptable to us.” Concerning length, Ergen said most deals are 3-7 years in length and this deal is “in that range.” Ergen said he was comfortable with the deal because Viacom treated EchoStar fairly for the company’s size and growth, and while “we certainly didn’t want to add 2… cartoon channels, that was very important to Viacom.” Previously, Ergen talked about Viacom’s insistence that EchoStar carry the Gas Network. During Thurs.’s call, he spoke about Noggin, another children’s programming channel the company has begun broadcasting “sight unseen. On the other hand, Viacom has a great track record” for programming channels.

Ergen said negotiations with Viacom “got off on the wrong foot” when the latter threatened to withhold the Super Bowl. They were “more tense than they should have been because there were some strong arm tactics. We'd rather have these negotiations privately,” he said. While removing channels wasn’t something the company wanted to do, Ergen said, customers are likely to be more upset about price increases: “The customer knows we care. We did everything to make sure we don’t raise rates, and that gets us customers, it gets us word of mouth.” Ergen said it’s too early to tell the impact of the 48-hour loss of channels.

Ergen said the company’s next major round of negotiations would be with Fox, but he didn’t expect problems. He said the consent order News Corp. signed concerning the company’s acquisition of DirecTV makes arbitration was the last resort. Additionally, “News Corp. has a long history of negotiations… I think there’s a lot of tradeoffs that can be [made] to get a great deal,” he said.

Meanwhile, Ergen said he was excited about the agreement with Gemstar and the acquisition of Superstar/Netlink, UVTV and SpaceCom (CD March 3 p18). The conversion of C-band customers from Superstar/Netlink is unlikely to mean a great increase in subscribers because the company already had a deal with EchoStar to convert annually to Dish Network exclusively, Ergen said. The agreement also paved the way for a “business relationship with the company so we can do things together,” Ergen said. Additionally, Ergen agreed that the agreement can only help the company’s relationship with News Corp. and DirecTV. However, he said an improved relationship with DirecTV would be due to new management at the company.

On broadband, Ergen said the key to success for the industry was the creation of a standard. While it’s unclear what News Corp.’s direction is, he said, EchoStar is willing to wait if it takes longer for the right decision: “I think broadband is really a 2005 product. We want to come out with it when it’s feasible.” Ergen also briefly discussed the company’s use of MVDDS spectrum, saying EchoStar and South.com (of which EchoStar holds a minority share) were looking at the technology but that the licenses, though paid for, hadn’t been granted. “It’s spectrum and its got some interference issues to overcome… It has a variety of potential uses. It’s a question of economics, whether any use is economical.” Because of those factors, he said purchasing the spectrum was “a bit of a gamble,” but that EchoStar was willing to work with other applicants to standardize technology and business plans. “That’s probably a 2005, 2006 kind of project for us,” he said.