In what some direct-broadcast satellite insiders saw as an
all-but-inevitable move, DirecTV Inc. filed a countersuit against EchoStar Communications
Corp. last week.
"Filing a countersuit is probably more strategic than
anything," Tellus Venture Associates president Steve Blum said. "It's part
and parcel of fighting the suit that EchoStar filed."
EchoStar filed suit against DirecTV in early February in a
federal district court in Denver, charging DirecTV with antitrust violations and
monopolistic practices in trying to shut EchoStar out of national retail distribution.
Last Monday, DirecTV retaliated with a suit of its own in
the same court, denying EchoStar's earlier charges and claiming that EchoStar
interfered with DirecTV's contracts, infringed on its PrimeStar trademark and misled
consumers with false advertising.
"It sounds like a bit of a food fight," The
Yankee Group analyst Bruce Leichtman said last week. "I'd like to see who gets
hit by the tomato first."
DirecTV's position is that EchoStar's original
suit is flawed because EchoStar claims regularly in its ads that cable, and not satellite,
is its primary competition. DirecTV's countersuit noted that EchoStar's strategy
of selling its service through local and regional retailers has been successful in
building a subscriber base of more than 3.4 million Dish Network customers.
DirecTV spokesman Bob Marsocci also said last week that
EchoStar has elected to market its products and services in a way that directly competes
with its retailers, rather than supporting them.
Later in the week, DirecTV announced that it would sell its
own hardware over its toll-free number, 1-800-DIRECTV. It also promotes
electronic-commerce sales through links to online retailers on its Web site. Marsocci said
DirecTV's direct-sales initiative is designed to complement retail, and not to
compete with it.
"Retail is our primary distribution channel," he
added. "It always has been, and it always will be. The majority of our customers buy
our product at Circuit City [Stores Inc.], Best Buy [Co. Inc.] or RadioShack."
Those three national retailers do not carry EchoStar's
Dish products.
In a conference call with analysts last Monday before the
DirecTV countersuit was filed, EchoStar chairman Charlie Ergen said the company would
continue to seek expanded distribution for its Dish products.
He assured analysts that the EchoStar suit filed last month
was "not a knee-jerk reaction," adding that he would decline further public
comment on the legal proceedings. "It's not something we're going to
litigate in the press," Ergen said.
DirecTV's suit claims that EchoStar interfered with
DirecTV's contract with Kelly Broadcasting Systems to deliver non-Hispanic
foreign-language channels starting in the first quarter of this year. In its suit, DirecTV
unveiled EchoStar's plans to acquire Kelly Broadcasting, which EchoStar confirmed
last Thursday in a press release.
EchoStar said it has appointed Kelly Broadcasting CEO
Michael Kelly as senior vice president of international programming and operations. In
addition, EchoStar will pay Kelly Broadcasting $3.5 million in cash, plus approximately
255,000 shares of EchoStar common stock.
Kelly Broadcasting had already supplied EchoStar with some
of its foreign-language programming.
At press time late last week, DirecTV had not yet said
publicly how it would proceed with plans for a non-Hispanic foreign-language service. The
company already delivers its "Para Todos" Spanish- and English-language
programming service to a number of U.S. markets, and it plans to go nationwide with the
service in the next several weeks.
In last week's lawsuit, DirecTV also claimed that
EchoStar used the PrimeStar trademark to mislead PrimeStar by DirecTV customers into
converting to EchoStar's Dish system.
Until recently, EchoStar targeted PrimeStar customers on
its Web site with a free-equipment offer and paid its dealers special commissions to
convert PrimeStar customers to Dish. DirecTV alleged in its suit that EchoStar and its
dealers attempted to confuse PrimeStar customers into thinking that the Dish hardware was
part of a normal equipment upgrade.
DirecTV bought PrimeStar Inc.'s medium-power
satellite-subscriber base more than one year ago, and it is still in the process of
converting the remaining customers to its own high-power service.
Ergen told analysts last week that EchoStar's
conversions of former PrimeStar customers are trailing off, and the company does not
expect to actively pursue that market going forward.
"The quality of the PrimeStar customers left is
suspect," Ergen said, adding that the PrimeStar customers Dish signed up earlier
"are good customers."
Another of DirecTV's complaints last week was that
EchoStar gained unfair DBS market advantage through falsely advertising the availability
of broadcast-network signals prior to the passage of the Satellite Home Viewer Improvement
Act. EchoStar launched local-to-local service in a number of markets before the
legislation was even enacted.
DirecTV also said EchoStar ran confusing ads with the tag
line, "Your Ticket to the NFL," designed to mislead potential customers about
the number of National Football League games available to the typical Dish subscriber.
Both EchoStar and DirecTV are seeking jury trials.
"Somewhere down the line, they'll settle, and
then hopefully, they'll both get down to the business of fighting cable," Alpert
& Associates president Mickey Alpert said.
"Once you go into court, you never know what's
going to happen," he added. "It's not a rational process."
