Five satellite antennas

Satellite TV broadcaster Dish Network Corp. spent the summer battling pirates.

As a result, it may have stemmed programming theft believed to have cost it hundreds of millions of dollars in recent years.

Dish Network’s piracy problem arose out of the growth of “free-to-air” (FTA) satellite equipment, which is meant for watching legal ethnic and religious programming offered unscrambled and free via satellite.

Anybody with a broadband connection and the willingness to illegally buy pirate software could, until recently, make the dishes capable of unscrambling Dish Network programming for free.

“It made it easier for consumers to be pirates,” said Jeffrey Blum, a vice president and lawyer for Douglas County-based Dish Network (NASDAQ: DISH). “You just buy the FTA box, and you download the software.”

Formerly, satellite TV pirates had to tinker with satellite TV receivers or buy them on the black market already illegally modified. With the new generation of FTA receivers, consumers could buy legal equipment and pirate Dish Network by simply going online.

A couple million sophisticated FTA receivers, made mostly in South Korea and China, have been sold in the United States. By 2006, somebody had cracked Dish Network’s satellite transmission technology and started selling illegal software downloads for use with FTA dishes.

Dish Network, its sister company EchoStar Corp. and its signal security joint venture called Nagrastar LLC, which makes Dish’s encryption systems, have been suing businesses it claims were selling FTA equipment and enabling piracy.

Last month, Dish Network won a legal settlement shutting down South San Francisco-based FreeTech Inc., a distributor of FTA satellites and receivers. Free-Tech and three of its executives agreed to pay Dish Network $106 million if they get back in the business.

Dish Network and its partners also sued ViewTech Inc., of Oceanside, Calif., another large FTA dish distributor, accusing it of being a front for piracy.

ViewTech countersued, claiming it’s a legitimate competitor of Dish Network and EchoStar, and that their lawsuits represent an attempt to kill off FTA distributors and monopolize the market.

That claim was undercut July 13 when the U.S. Department of Justice indicted ViewTech owner Jung Kwak on a piracy charge based on allegations that he, in 2008, offered $250,000 to obtain a memory chip from the new Dish Network encryption system, and sought to recruit hackers to crack it.

Dish Network, Nagrastar LLC and EchoStar also are suing three other companies: Sun Valley, Calif.-based distributor Panarex Inc., South Korean manufacturer Global Technologies Inc. and SonicViewInc. of Carlsbad, Calif.

Also, Dish Network spent millions mailing new encryption cards for its 13.6 million legal customers to install in their set-top boxes. Then in June, the company stopped using the signals that had been hacked, theoretically cutting off the growing black market.

Its newest card also may get cracked, and it’s unclear whether the company has notched a major legal win against piracy, said Jimmy Schaeffler, an expert in satellite TV technology with the Carmel Group in Carmel-by-the-Sea, Calif. The company was subpoenaed to submit testimony about the scope of piracy as part of the FreeTech case.

Not all the terms of Dish Network’s settlement with FreeTech have been disclosed. Even so, it probably involved too much compromise to be considered an outright victory against piracy, he said.

“If those guys made $500 million, and EchoStar has to ignore the other $400 million, maybe EchoStar didn’t really win,” Schaeffler said.
Ergen’s stance on cable piracy

Dish Network co-founder and CEO Charlie Ergen has brought up piracy several times in discussions with Wall Street analysts in the past year. The lure of piracy has been a factor in its recent difficulty adding subscribers, and its security-card replacement made it harder to hold on to existing ones.

“I think piracy and fraud as a group is a significant factor in our business,” Ergen said. “It’s not just with Dish Network. It’s whether the guy is stealing cable or whether he’s stealing DirectTV.”

With cable TV’s premium content now largely handled by encrypted digital transmission, pirates have found it easier to target satellite programming with large-scale, organized theft.

The current generation of encryption card made by Nagrastar, and sold by EchoStar to Dish Network and Canada’s largest satellite TV company has proven to be more easily hacked and pirated than DirecTV’s cards, said Schaeffler.

El Segundo, Calif.-based DirecTV Group Inc. — the 18 million-subscriber satellite leader that’s majority-owned by Douglas County-based Liberty Media Corp. — paid for a more sophisticated security card that hasn’t been hacked in years, Schaeffler said.

“The core of North American paid TV piracy is now focused on Dish Network and Bell,” Schaeffler said. “There’s no DirecTV hack, and no digital cable hack.”

The Carmel Group estimated that before Dish Network started issuing new security cards for its set-top boxes this spring, as many as 2 million North American households received stolen Dish Network programming.

Those numbers, if accurate, mean Dish Network has lost hundreds of millions of dollars in potential subscriber revenue annually since 2006.

Credit Suisse analyst Spencer Wang projects that shutting down the piracy could prompt 150,000 to 300,000 U.S. households that were receiving signals illegally to start paying Dish Network. That would account for 6 percent to 12 percent of the new subscribers Dish Network is expected to add this year.

Dish Network declines to talk about how much piracy has cost it.

“There’s a lot of money at stake,” Blum said. “It’s a never-ending thing. People like hacking, and it will probably never go away completely.”

The company dedicates staff to tracking down pirates and has spent millions on litigation. Yet it remains mostly silent about the issue publicly.

Schaeffler believes that’s a mistake. People would take piracy more seriously if they understood it meant that hundreds of millions of dollars that normally would go to the U.S. entertainment and media industries instead went to black marketers’ foreign bank accounts, he said.

The cracking of Dish Network’s last encryption cards caught the company by surprise, Ergen said.

It took more than a year to learn what the pirates were doing and to prepare a new encryption card, and then months more to distribute replacement encryption cards to millions of customers so Dish Network could shut off the signals that pirates had tapped.

“We won’t make that mistake again,” Ergen told analysts in a conference call.

Dish Network and its affiliates started working on a future encryption card even before they completed the card swap meant to end the current rash of FTA piracy. But Ergen acknowledged that won’t stop piracy forever.

“It’s a little bit like Whack-a-Mole, and we’re knocking down those guys who had their head up pretty high,” he said. “And we know that there will be some people falling in behind them.”

Denver Business Journal