Fox Network Is Letting Time Warner Cable Do What?

Winter Solstice has come and gone. As the hours of darkness shorten, the coldest days of winter are still to come. Somehow the impending gloom of winter sets just the right mood for the ongoing retransmission consent and content licensing tussles that come around this time of year.

Time Warner Cable is shaking things up with Smith Broadcasting and Sinclair. You may remember a while back, it was Sinclair who was involved in very nasty and public negotiations with Mediacom. The big issue between Time Warner Cable and Sinclair is that Sinclair is tying retransmission consent for their CW stations to retransmission consent for their Fox affiliated stations. While the concept of tying is nothing new in the content distribution world (most cable network groups require carriage of multiple services by cable operators, much like the way studios license packages of movies to broadcasters or premium services) it somehow takes on a different flavor when it is coming from the broadcasters. Time Warner would rather have the option of not carrying the CW stations or forcing them to elect must carry status with no payment required.

What make the negotiations different this time around is that Time Warner Cable has a card up their sleeve - apparent rights from Fox to carry network programming via an "insurance feed" or “cooling off feed” for up to a year. Understandably, this has left many local Fox affiliates feeling a bit confused and thrown under the bus. It is a surprising development in that it is the first time that a broadcast network has given these kinds of rights to cable operators. Just as curious is that the provision of a “cooling off” feed was not mentioned by either Time Warner Cable CEO Glenn Britt or Fox Broadcasting COO Chase Carey as part of their testimony during last month’s hearing on retransmission consent. Surely pointing to this as an example of a creative market based solution would have gained points with lawmakers who were grilling them that day.

To be sure, it’s not perfect. The deal allows Time Warner to get the national programming from the local stations feed for a reported 70 cents per subscriber per month, as long as the local affiliate OK's it. Truth be told, it is mainly the network programming that people are tuning in for anyway. The arrangement still allows the local station to deny access to its local news programming and syndicated fare. The 70 cents would then be split between Fox and the local affiliate. The big "gotcha", of course, is that the local affiliate still has the option of saying no and blocking the feed. All the same, it is something. Nonetheless, Sincliar is reportedly not interested in the option. Apparently they are not too thrilled about their take of the 70 cents.

While the local affiliate still holds the cards, it does give the network some political cover. The larger question is whether other broadcast groups will offer similar rights to other cable operators, telephone companies or satellite distributors. As the arrangement stands now, it is not a game changer, but there is a potential that the playing field could shift subtlely with broadcast affiliates left questioning where the allegiances of the network suits really lie. Does it get any colder than that?

Retrans Recap

So, the Retransmission Consent hearings are over (for now) and all of the usual suspects got to have their say on the issue. Keeping to the script, the MSOs asked for some changes in the regime, arguing that Retransmission Consent is another in the long litany of special privileges that broadcasters enjoy. Broadcasters insisted that they need a dual revenue stream to compete. Small programmers argued that the tying involved in many Retransmission Consent agreements makes it difficult for them to gain carriage. For the most part, the hearing was predictable and civil. It was, however, suprising to hear Jay Rockefeller (D WV) rant on the record about the polarizing nature of Fox News and MSNBC and his wish that the FCC could somehow make them go away. It was no suprise either that several Senators suggested the popular notion that the time may have come for the industry to consider a la carte pricing models. Other than that there was not much newsworthy that came of it as John Kerry (D MA) tried to keep the hearing focused on finding a solution to keep broadcast signals on cable systems during retransmission consent negotiations.

It's always easy to tell who benefits the most from the status quo - it's the guy who defends it the most vigorously. That was the role that Chase Carey from Fox played. Carey insisted that taking away the ability to deny carriage strips him of his leverage and eliminates any incentive for a cable operator to get a deal done. He also pointed fingers at Cablevision as the party that used it subscribers to win political gain. Well, there was a hearing after all.

More than a few eyebrows were raised by the fact that different cable providers in the same market can be charged different rates by the same broadcaster for the same signal. In an effort to bring a modicum of transparency to the process, it was suggested that the numbers involved no longer be subject to confidentiality (gasp!).

More than once the lawmakers suggested (or threatened) that if "the market" can't figure things out on their own, then Washington will get involved. With that stance it won't be a suprise that there will be more high profile retransmission consent disputes that result in temporary drops of broadcast feeds. For now it is hard to see what the appetite inside the beltway is for taking another swipe at cable regulation given the much larger problems that the country faces. One thing is for sure, once the ball gets rolling it may be a matter of "being careful what you wish for". Washington is a sausage factory. You can start out with the best of intentions, but along the way it inevitably gets ground up and flavoered beyond all recognition. But for now Retransmission Consent is like the weather, everyone talks about it but nobody does anything about it.

Cablevision vs. FOX: The Good, The Bad and The Ugly

October is winding down, trees are ablaze in orange and red, football season is in full swing while baseball season has boiled down to two teams, but it seems like everyone’s attention is held by the animosity and accusations that are being flung like so much mess in the primate house. No, I’m not talking about the waning days of highly contentious mid-term elections; I’m talking about the very public dispute between Fox and Cablevision.

It’s a week after local Fox stations going dark on Cablevision systems and the rhetoric is getting even hotter. Politicians ranging from NJ Governor Chris Christie and MA Senator John Kerry have weighed in. Meanwhile, Cablevision subscribers have been without the post season play of their beloved New York Yankees and may soon miss out on the World Series. I don’t think this is what Washington had in mind when the retrans rules were written. They expected reasonable people to come to a business agreement. Instead, what they are seeing are media moguls tussling over money while the consumer is held hostage.

Now the latest developments have both sides crying foul and hitting the press with both guns blazing; Cablevision accusing Fox of not negotiating in good faith by making “take it or leave it” offers and Fox accusing Cablevision of asking for preferential treatment (don’t get me started on MFNs) and manipulating the whole process to bring about a political resolution and a change in the law. Cablevision is making hay of Fox’s refusal to submit to binding arbitration. There was even a point where Cablevision subscribers were denied access to Fox programming on the internet. Now Fox is threatening to sue Cablevision, asserting that the MSOs phone reps are telling subscribers they can get their favorite Fox programming by accessing pirate websites. While there may be a grain of truth to each of the accusations, the amplification of the distortions makes each side’s argument look like signs at a Tea Party rally. There seems to be no end to the lengths that both parties will go to make their respective points. Jimmy Dolan even suggested a meeting be held with himself, FOX CEO Chase Carey and the FCC to hammer out a deal.

So there you have it. Another carriage dispute made very public as the cable and broadcast industry both air some very dirty laundry. Who’s right? Who’s wrong? How long will it go on? Who knows? Programming deals are never easy, and retrans deals are probably the toughest of all. While there may be something for the cable guys to gain by making the process political theater, in the short them the only thing to be had is consumer disgust. In the mean time Dolan watching continues to be one of the industry’s favorite spectator sports.

Comcast - CBS Deal Completed Above the Fray

The announcement is out that Comcast and CBS have entered into a 10 year distribution deal that covers retransmission consent of CBS O&O stations as well as carriage of Showtime, Smithsonian Channel and the CBS College Sports Network and On Demand and online rights for certain CBS owned programming. This deal is notable for several reasons

First off is the term of the deal. Rather than keep the term to 3 years in order to mirror the usual retransmission consent election cycle, the deal has a 10 year term which is rather long by industry standards. As noted by CBS CEO Les Moonves, “There is a lot of flexibility built in”. I certainly hope so given the speed at which things change in the industry.

Secondly, the agreement encompasses more than just retransmission consent. Comcast was smart to tackle all of the networks at once. Strategically, it allowed them the ability to do some good old fashioned “horse trading”. As any negotiator and chess player knows, the more pieces you have to move around on the board, the better deal you are able to craft. There is no word whether CBS College Sports will be moved from the poorly penetrated Comcast sports tier to a more penetrated “digital basic” or “expanded basic”. Of course, it doesn’t hurt that Comcast is the largest player in the game either.

Lastly, the agreement was hammered out behind closed doors. Unlike recent negotiations between other cable operators and broadcasters, there were no public theatrics or threats of pulling the stations off the cable systems. Not that I expect this to change the very public way in which Time Warner Cable and The Walt Dinsey Co. are engaging over ESPN and ABC. To be sure, Comcast has traditionally handled their negotiations without high public drama. Even more so lately as the last thing that Comcast needs is a high profile struggle with a broadcaster at the same time that their deal to acquire GE’s NBC-Universal is under review. Perhaps CBS knew that and played it to their advantage.

As if to underline the nature of Comcast’s negotiation style, there was little chest thumping by CBS. While neither party disclosed the financial terms of the deal, there was no grand statement by CBS that the deal is proof that the "marketplace works". That pronouncement will be left to the NAB. However Moonves did say that Comcast negotiated in good faith and “kept their word” – just what Comcast needs the regulators to hear.

STARZ Original Programming: Billion Dollar Baby

Reports are that STARZ CEO Chris Albrecht has been tasked with raising $1 Billion of off balance sheet financing for original programming. This is yet another confirmation that original programming will continue to be the tentpole of the premium service business.

In 1975, when HBO launched as the first national premium service, the idea of showing Hollywood titles on a round robin basis made sense. TV viewers had little alternatives other than local broadcast stations and a handful of nascent cable nets. Early VCRs were just starting to come on the market. Fast forward to today and between online viewing, retail and rental; not to mention cable VOD, the consumer has a variety of methods to receive Hollywood titles.

So it is no surprise that premium services continue to stress the importance of original programming, whether it is True Blood on HBO, Dexter and Nurse Jackie on Showtime or the slate of programming that STARZ is looking to produce with the new financing. A large part of the reason STARZ brought Albrecht on broad is as a result of his experience with original programming while he was at HBO.

This latest foray by STARZ is a natural and necessary step in their evolution. Although they have aired some original programming along the way, it was never to the same extent as HBO and Showtime. This is a great opportunity for STARZ to really shine.

Is it Time for Cable MSOs to Think Small?

The coverage continues to fly about Time Warner Cable CEO Glenn Britt’s comments about the possibility of smaller packages of cable programming at a lower price. While not going so far as to endorse a la carte carriage of cable services, Britt’s comments does point towards a package of programming made up of 40 or 50 channels. The tricky part will be what gets put in the package and what gets left out.

Industry research shows that the average cable viewer watches only between 10 and 17 networks on their service on a regular basis. However, each individual cable subscriber has a different list of favorite channels. The issue is compounded even more in households where mom, dad and each of the kids all have a different list.

While Glenn Britt should be applauded for moving the conversation forward, we have yet to hear from the content providers (one wonders if Mr. Britt would have made these types of comments before Time Warner Cable was spun off by its parent company). In the final analysis, the cable operators can only do what the programmers will allow. There is an expectation that smaller operators with no programming interests would love to get in on this plan. The stumbling block in the plan is that most of the programmers currently in the large “expanded basic” package likely require broad penetration as a condition of carriage. Even networks with limited appeal like Food Network and Versus could have these kinds of packaging requirements. I ask you, what network owned by a major media company will be the first to step up and permit a cable operator to reduce their distribution by putting them on a lower penetrated tier?

If it is truly a matter of controlling costs, then logic would dictate that the networks with the highest license fees would be the first to go. While some subscribers may be indifferent to the loss of highly priced sports services like ESPN and the local regional sports networks (which are typically owned by cable operators like Comcast and Cox) in return for a reduction of their cable bill, other subscribers will certainly not be happy. Of course, all it would take to derail the plan by Time Warner would be a competitor like Verizon, AT&T, DISH or DirecTV committing to keeping these services on their expanded basic service.

An alternate strategy of placing a bunch of inexpensive and relatively low viewed services like home shopping and religious networks services on a low cost introductory tier and bundling the popular services like Discovery, Disney Channel, Nickelodeon and TNT on a more expensive tier will do nothing to truly address the issue and will further damage the low reputation that cable providers tend to have among the public.

While many cable subscribers intuitively like the idea of a la carte, the average consumer’s concept of how it would likely operate is ill informed at best. Subscribers currently now getting 100 channels for $50, will not be able to simply choose any twenty channels and only pay $10. It’s not going to work that way, as cable networks will need to increase their per subscriber rate as they lose subscribers in order to be kept whole, especially taking into account the resulting loss of advertising dollars.

At the end of the day it’s all about total revenues for the programmers with the operators increasingly feeling like collection agencies for the networks. Something tells me that we haven’t seen the last of this kind of talk. If anything, the operator/programmer relationships will continue to be thorny. Networks continue to insist on wider distribution for their new and emerging services and operators of all sizes continue to find their margins squeezed by an increasingly frugal subscriber base that is beginning to look at other options for video.

Comcast/GE Head to the Hill

Tomorrow is a big day for Brian Roberts and Jeff Zucker as they head back to Washington to appear at two back-to-back hearings. In the morning they are slated for the House Communications and Internet Subcommittee, while the afternoon is the Senate Judiciary Antitrust Subcommittee. Also slated to testify at both hearings is Colleen Abdoulah President and CEO of WOW (Wide Open West) and Mark Cooper of the Consumer Federation of America. It will be interesting to see if those opposed to the merger get beyond the standard “big is bad” rhetoric that is the standard backbone of their opposition to explain exactly what their issues are.

In a world where the big keep getting bigger in order to “gain scale”, there is no question that it has become increasingly difficult for the small guys to compete. Comcast has been quite public in stating that the reason they are doing the merger is to gain scale in the programming realm. Content is still king, and those who own the content and access to it are in a position to reap the greatest profits.

Perhaps of greatest concern to WOW and other competitors like RCN and Knology, not to mention Dish Network and DirecTV, is how Comcast sets the rates for its own content in terms of the rates that their programming arm charges their cable arm. It is no secret that MFNs for the largest players in the distribution game often dictate higher rates for smaller operators, including competitors. This often leaves smaller companies feeling like they are subsidizing the larger players. A scenario where a programming entity setting their rates based on what their affiliated distribution company (which, by the way, is the largest in the market) agrees pays for that content justifiably raises concerns about the unfairness of an “out of one pocket in into another” arrangement. There is sure to be even more concern now that retransmission consent is involved.

Curiously absent from list of witnesses at tomorrow’s hearings is anyone from the satellite or telephone company community. The NBC broadcast affiliate group has already suggested strings, and there is no doubt that other parties will be joining in as the regulatory approval process proceeds. There may be little doubt that the merger will ultimately be approved. However, the larger question may well be what strings will be attached and, if one is to look at the merged Comcast/GE as Jonathon Swift’s Gulliver, whether the strings will be strong enough to hold the new media giant down for long.