Kafka came out swinging: "What's wrong with ads? Why do you want to kill ads?" Ergen answered: "I don't want to kill ads. I think advertising is great, and I'm very aware that there are multiple revenue streams in television. But, I also don't want to put my head in the sand, and I think the world is changing. As a consumer, I don't want ads that aren't relevant. I think Hulu's approach is a step in the right direction, which lets you have some level of choice over the ads that you see. With the Hopper, you have the ability to target an ad. For example, a single mom may not need that testosterone ad. The broadcast industry is slow to adapt to that. When we helped invent the DVR, notwithstanding what TiVo says, the world changed. It makes sense to give people more targeted ads that make sense to them -- you can run fewer ads and make more money. Our vision is just to do it another way."
Kafka then asked him to elaborate a bit on the specifics behind the company's ad skipping technology. "We aren't allowed to change commercials -- we can't change the content of that stream, so we can't do a targeted ad if we wanted to," said Ergen. "We can't erase the ads -- even on the Hopper, the ads are still there if you flip back. The litigation that's going on today will ultimately decide the fate of commercials. Be careful what you wish for, because if the broadcasters win, they could be in a position to block the DVR. We've won more than we've lost, but we've lost our fair share."
Kafka then turned the conversation a bit, why he'd put such a focus on ad skipping, and how the relationship was with its content partners.
Ergen answered: "The technology has changed, and we have to look at the total universe of what we compete against. All of their products skip commercials -- on the internet, you're commercial-free on many things. So for us, we have to make our product better. And if we're taking a side, let's take the side of the consumer."
Next, Kafka asked why the Hopper would only skip ads on broadcast / network shows, and not cable TV shows. Ergen stated: "Technically, we're only allowed to skip ads with broadcast networks. Because of local spot beams, the networks are the only ones transmitting on the same transponder. We can't replicate that with cable channels, because you can only record one transponder at a time. It's a technical limitation -- it's technically not possible to do it beyond what we do today."
Kafka then asked if the Ergen wanted to change the way TV looks and works. Ergen's response?
"Today, customers have some choices, but channels are exactly the same on each one. We try to make our user interface a little better, and we believe that in most cases, it's better for the consumer to pay for the content one time, and then watch that content wherever they are -- we don't want them to pay extra for new devices. That, in turn, makes the content more valuable. Ultimately, you need a wireless network outside of the home to achieve that, and we'd like to own a wireless network so that we could ensure quality."
"We're still for a la carte, because the internet is a la carte today and we know we have to compete there. It's going to go there slowly, would be my guess. Having said that, we can't change it (when looking at channel bundles). It's pretty easy to steal on the internet. I remember being in India watching a movie before it even came out in America -- I was just testing it, you know. [Chuckles.]"
Kafka then asked about the potential for these bundle deals "breaking," to which Ergen suggested that pay-TV carriers may very well "sow the seeds of our own destruction" while a player like YouTube or Amazon breaks it down and gives consumers more of what they truly want, and less of what they don't." He even confessed that he loved Netflix's House of Cards, and that he only wishes he would've thought of it first.
"There's a reason why tobacco companies give away free cigarettes on college campuses," Ergen said. "We need to hook people on pay-TV while they're young. [Chuckles.] As a company, we're hobbyists. We hope we make money, and historically we have. If we make good products, we'll make money. We're not afraid of change. When you run a business, you can fight change or embrace it -- long-term, it's less risky to embrace it. You can lead it and make the rules (or be a fast follower), or be a slow follower and pay more later." Kafka followed up with a question of "when" Dish noticed that it'd need to make a change. Ergen said that five years ago, he noticed that monopoly broadcasting would get pay-TV carriers to over $100 per month, and in turn, change would come. From there, he realized he needed to get into the wireless business, in order to "take care of customers inside and outside of the house."
Kafka then turned the topic on Ergen's desire to get into the wireless space.
"First and foremost," Ergen said, "we want to do video inside and outside of the house. When we got into it, though, we realized that pretty much everything is just data. If we built a network to do video, we could also do voice and broadband."
Kafka then pointed to the gobs of spectrum that Dish owns, and asked Ergen point-blank what he intends to do with it. "Ideally, we'd build a network," said Ergen, "because all networks that already exist were built first for voice. If you built a new one today, you'd build it materially different. Because we took so long to get a license, it makes it more difficult for us. That's probably outside of the grasp of reality, as much as we'd love to do it -- so, it's probably better to work with someone that has infrastructure. How we go about doing that, and whether we get a chance to, remains to be seen."
Kafka naturally turned to Dish's bid for Clearwire, and asked him to talk about his hopes and dreams there. "Our intention was not to sell the spectrum -- the FCC did us a great favor by allowing us to use satellite spectrum for terrestrial use if we wanted to, and we could've made billions of dollars. But, we don't want to sell the spectrum. By taking as long as it took, it was devastating. By the time we got the rules changed, Clearwire was already being acquired, and MetroPCS was as well -- now, there's really just Leap, Cricket and us. The rest have dance partners already."
Kafka then questioned about Plan B, assuming that the deals don't go through. Candidly, Ergen said: "For $100 bucks (previously suggested as the cost to attend this here event), you aren't getting Plan B." To no one's surprise, the audience found that quite amusing. Turning to a more serious response, Ergen noted that it's "more likely that we'd sell the spectrum rather than build a network ourselves. We'd just say that we failed and put the for sale sign out -- it wouldn't be the first time we've failed."
Thanks for the honesty, Charlie -- it's markedly refreshing to hear.
We'll be reporting live from D:Dive Into Media as it continues on February 11-12. You can follow our coverage by using the "dmedia2013" tag.