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Walt Disney, Dish Network reach watershed agreement

Dish Network (DISH) has struck a deal with Walt Disney (DIS) to gain access to the entertainment giant's broadcast and cable programming on televisions and Internet-connected devices. In exchange, the second-largest Pay TV provider has agreed to place limits on its controversial AutoHop feature that allows viewers to easily skip commercials on broadcast networks.

The ramifications of this agreement are significant, particularly as federal regulators wrestle with the issue of network neutrality -- the idea that all websites should have equal access to the Internet. It also avoids a blackout of Disney's content and gains key support for the upcoming SEC Network, a sports cable channel that is a 50-50 venture between Disney and the collegiate athletic conference.

"We would expect DISH to join Netflix, Google, and others in arguing that usage-based pricing, usage caps, and other more generic net neutrality transgressions all loom as potential abuses that ought to be regulatorily prohibited," according to a note issued today by Michael Nathanson of MoffettNathanson.

Dish Network and Disney executives hailed the agreement as a watershed moment for the television industry. Anne Sweeney, the head of Disney/ABC Television Group, described the agreement in a press release as "one of the most complex and comprehensive we've ever undertaken."

"Not only were innovative business solutions reached on complicated current issues, we also planned for the evolution of our industry," she said.

Under terms of the deal, Dish Network subscribers will gain access to Disney online and mobile apps such as Watch ESPN, for the first time, enabling them to view the company's content on mobile devices either live or on-demand. Dish Network's AutoHop feature will be disabled for ABC programs until three days after the show airs. Disney, which is based in Burbank, Calif., has agreed to dismiss its lawsuit against Dish over AutoHop. Other media companies have filed similar suits and the Disney deal could lay the groundwork for Dish Network to settle those cases as well.

The agreement quells worries that Dish Network Chairman Charlie Ergen would drop ESPN, a cash cow for Disney that is by far the most expensive cable channel, because of its cost. Ergen, a billionaire who controls the company, has repeatedly complained about escalating sports programming costs.

"For now, the sports-lite strategy will remain nothing more than a theoretical curiosity," writes Nathanson in a note distributed to clients today. "It was never a realistic expectation that Disney might seriously entertain a contract provision allowing DISH, or anyone else, to pursue this strategy."

The Disney deal gives Dish Network the ability to market its Internet-based service to the estimated 5 million to 10 million "broadband only" homes, according to Nathanson. It also avoids a potentially ugly fight with Disney over retransmission fees, which cable and satellite channels pay to provide content to their customers.

Time Warner Cable (TWC) lost 300,000 customers last year because of a fee dispute with CBS (CBS) that lead to a month-long blackout of the Tiffany Network. The spat was one of the reasons why Time Warner Cable decided to sell itself to larger rival Comcast (CMCSA) for $45 billion. Dish Network's rival DirecTV dropped the Weather Channel earlier this year because of a fee dispute.

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