Lawsuits fly over Dish’s Auto Hop service

Analysis: Retrans fees lurk at the heart of the dispute

Dish Network’s new service allowing customers to automatically skip through commercials landed in federal court on Thursday, as Fox, CBS and NBC filed separate suits to stop it while the satcaster sought a judgment upholding its right to deploy the controversial technology.

But while all the legal wrangling concerns the limits of Dish’s new offering, an old issue remains at the heart of the conflict: the retransmission consent fees that are a windfall for broadcasters but an irritant to the distributors paying them.

Fox, CBS and NBC each filed suits in U.S. District Court in Los Angeles, claiming that the AutoHop feature constitutes copyright infringement and a breach of their carriage deals. Dish Network filed its suit in a New York federal court.

A spokeswoman for ABC could not confirm if the network planned to file as well. Disney had already said it was investigating the issue.

Litigation has been expected over the Dish feature since its introduction in early May, as it already has stirred ire among the broadcast networks. Multiple execs publicly blasted AutoHop in recent weeks for undercutting their primary revenue stream, advertising.

Fox said in a statement, “We were given no choice but to file suit against one of our largest distributors, Dish Network, because of their surprising move to market a product with the clear goal of violating copyrights and destroying the fundamental underpinnings of the broadcast television ecosystem.”

In addition to targeting AutoHop, Fox, CBS and NBC contend that Dish offers an unauthorized video-on-demand service, PrimeTime Anytime. Both AutoHop and PrimeTime Anytime are part of the Hopper, a new multi-room HD DVR service Dish rolled out in March.

While AutoHop gives viewers the option to removes ads from broadcast programs a day after they air, PrimeTime Anytime automatically records an entire evening’s primetime programming from the Big Four and stores as much as 100 hours of that content for eight days.

Neither technology affects the CW or cable channels, though the companies involved in the lawsuits may be acting now to prevent further encroachment.

The litigation sets up a high-stakes battle in court – or possibly just the negotiating table – that is the latest effort by broadcast networks to protect their revenue streams in the face of new technology. The broadcasters are seeking to shut down a startup firm, Aereo, that streams New York broadcast signals to subscribers.

In seeking a declaratory judgment, Dish said that it remains in compliance with its agreements with the networks. “Viewers have been skipping commercials since the advent of the remote control; we are giving them a feature they want and that gives them more control,” said David Shull, Dish’s senior VP of programming.

Dish also disclosed that CBS, Fox and NBC have rejected ads for the service that features the AutoHop function.

Distributors like Dish may be sore about the rapid growth of retrans fees, a relatively new revenue stream they didn’t have on their ledgers until recently. With Hopper, Dish may be taking an aggressive tactic to get some added value like ad-stripping to justify the new fees.

“It may actually be using this technology to gain some leverage in carriage negotiations where broadcast networks have substantially more power over the MVPD and can ask for growing monthly fees,” said Janney Capital Markets analyst Tony Wible in a research note preceding the lawsuit.

In past carriage deals involving retrans dollars, networks granted specific VOD rights to programming. Broadcasters, have deemed retrans fees necessary to keep up with skyrocketing costs of programming, particularly sports.

Nomura Research found that the four broadcast nets more than doubled their retrans revenues last year to $394 million, and could end up doubling that number yet again this year, to $750 million.

Dish Network chairman Charlie Ergen has never been shy about tangling with the networks before. In 2010, News Corp. yanked signals to many of its cable channels for nearly a month after the satcaster couldn’t come to terms on a carriage agreement. Given how retrans often figures into blackout disputes, the cable industry has called on the FCC to take a closer look at retrans fees.

While the networks’ lawsuits suggest there are billions of dollars at stake, Wible estimated that the actual damage done may be “drastically overstated” in the short term. He pegged the immediate loss in ad revenue from the Hopper to be at $162 million for the Big Four combined, or about 1% of their total ad revenues. “Nonetheless, we do see how this can be seen as a long-term threat as DVR penetration grows,” he conceded.

While Dish hasn’t disclosed just how many homes have the Hopper, Wible said the total is likely a fraction of the net’s 14.1 million subs, which comprise 12% of U.S. broadcast homes.

The degree of control to which consumers have over the technology may emerge as a central legal issue in the conflict. The networks allege with regard to Primetime Anytime that the DVRs are filled with their programming without taking any action, while Dish argues it is their subs that are in control. A similar fracas between Cablevision and the programmers erupted over the cable operator’s remote-storage DVR, which was ultimately cleared for deployment when the Supreme Court in 2009 declined to review a lower court ruling upholding the technology’s legality.

In addition to protecting their broadcast interests, the congloms involved in the suits were keeping an eye on their digital properties as well. Both suits note that Dish execs were quoted suggesting Primetime Anytime is a competitive response to Hulu, in which both News Corp. and NBCUniversal have stakes. Hulu’s most valuable component is next-day access to broadcast programming.

Fox’s suit also singles out a third Dish technology for treading on the rights it has granted Amazon and iTunes to sell content online: the Sling Adapter, which allows subscribers to move content intended for their TVs to digital devices. That functionality is not related to the Hopper and has been offered by Dish for several years.

Neither CBS’ nor NBC’s suits mention Sling, but they issued statements accompanying their lawsuits echoing many of Fox’s concerns.

“Dish simply does not have the authority to tamper with the ads from broadcast replays on a wholesale basis for its own economic and commercial advantage.”

In its own statement, CBS said, “We believe this is a clear violation of copyright law and we intend to stop it.”