Cable Operators

Food Fight Rages On

1/09/2010 2:00 AM Eastern

Don’t mess with the Dolans.

That may be the hardest truth facing Scripps Networks Interactive as it sits out a cable-carriage scuffle with Cablevision Systems in the New York City market that has left Food Network and HGTV off the air.

While this is the first time in several years that Cablevision, run by the Dolan family, has faced a programmer that pulled a network, it isn’t afraid of a fight. In 2002, it passed on carrying the Yankees Entertainment & Sports Network, which was off Cablevision for about a year, despite cries from fans of baseball’s New York Yankees.

And any thought that the Bethpage, N.Y.-based MSO will blink first in this fight is seriously misguided, according to analysts that follow the company. “Cablevision and its management team simply do not follow the playbook of their peers and its behavior does not always appear rational to outsiders,” wrote Pali Research media analyst Rich Greenfield in a note last week. “We suspect Cablevision is simply trying to draw a line in the sand.”
Cable operators were able to bury the hatchet in two high-profile retransmission consent disputes (Time Warner Cable vs. Fox and Mediacom vs. Sinclair Broadcast Group) earlier this month. But the Scripps-Cablevision tussle has the potential to carry on, and that could have broader implications across the industry, including a reopening of the debate over the a la carte sale of cable networks to subscribers and the introduction of government intervention in carriage disputes.

 

While TWC and News Corp.’s Fox reached an agreement at around 7:15 p.m. EST on Jan. 1 (just in time for the 8:30 p.m. airing of the Allstate Sugar Bowl), neither side was claiming outright victory in the matter. “We’re pleased that, after months of negotiations, we were able to reach a fair agreement with Time Warner Cable — one that recognizes the value of our programming,” News Corp. chief operating officer Chase Carey said in a statement.
Time Warner Cable chairman and CEO Glenn Britt was equally pleased.

 

“We’re happy to have reached a reasonable deal with no disruption in programming for our customers,” Britt said in a statement.

That lack of high-fives could be an attempt to divert attention from regulators or to downplay the hype and rhetoric that normally characterize retransmission battles.

Precisely what each side demands — and ultimately gets — is the subject of intense scrutiny. Fox, which was reportedly seeking $1 per month per subscriber for its stations, said it had more viewers than ESPN, which can charge distributors up to $4.50 per subscriber per month. Scripps said it was charging Cablevision less than 25 cents for both Food and HGTV. Miller Tabak media analyst David Joyce said that talk could have unintended consequences.

“That is bringing to the consumer’s mind now that there is a value to be ascribed to individual cable networks or stations,” Joyce said. “I think it is going to stir up the bee’s nest of a la carte again.”

Cable operators do not want a la carte regulation, which would force them to allow subscribers to purchase only the channels they want, on an individual basis.

According to cable affiliate sales executives who asked not to be named, Time Warner agreed to a six-year deal beginning at 50 cents per subscriber per month in the first year and escalating to $1 per subscriber per month in the last year. Fox was reportedly asking for a $1 fee. Time Warner Cable and Fox would not comment on the terms of the deal.

Mediacom Communications also managed to eke out a deal — for one year — on Jan. 7, avoiding a blackout of 22 stations in 15 markets with about 600,000 Mediacom subscribers. MSO vice president of legal and public affairs Tom Larsen said that while Mediacom is pleased it reached a deal, it will still pursue retrans reform in Washington.

“There is a risk that 12 months from now we could be back in the same position,” Larsen said. “That’s why we need to take that message to Capitol Hill. We need these laws to reflect the reality of today’s market.”

According to Sanford Bernstein cable and satellite analyst Craig Moffett, higher programming costs are translating into higher basic-cable rates from cable operators, with Time Warner Cable and the telcos (Verizon Communications and AT&T) taking the largest rate increases (around 7%). Cablevision, Comcast and DirecTV are implementing the lowest (3% to 5%), he said. In Manhattan, Time Warner Cable announced a 5.6% video-rate increase, although that was likely determined well before the Fox deal was reached.

Meanwhile, Cablevision Systems was digging in its heels, refusing to accept what it called an onerous fee increase for Scripps Networks Interactive’s Food Network and HGTV channels. That caused Scripps to pull the channels from Cablevision’s 3.1 million subscribers and touched off an increasingly nasty ad campaign on both sides of the issue.

In newspaper, TV and Internet ads throughout the metro New York area, Cablevision is driving home the message that Scripps is asking for a huge fee increase ($20 million annually) for a network that few of its customers watch. Scripps said Cablevision’s math is wrong and points to record ratings for its Food Network shows, countering that it is only asking for fair value for its content.

Collins Stewart media analyst Tom Eagan estimated that Cablevision could lose between 10,000 and 20,000 customers in the dispute and be economically indifferent to a 50-to 75 cent fee for Food and HGTV, assuming that it passes on 50% of the cost to its subscribers.

It appeared that late last week there may have been a break in the impasse, after Scripps said that it held a brief meeting with Cablevision. “We reached out to Cablevision and had a constructive meeting in Bethpage [Cablevision headquarters] today [Jan. 6],” Scripps Networks spokeswoman Cindy McConkey said. “We made some limited progress and we continue to hope we can move this discussion forward.”

That both sides agreed to meet even briefly appeared to be a shift in the tone of the negotiations. Scripps has accused Cablevision of refusing to return to the negotiating table, answering every request with a “take-it-or-leave-it” offer that Scripps has characterized as unacceptable.

“We met and we appreciated the opportunity to discuss these issues with Scripps,” Cablevision said in a statement. “We can’t comment specifically on the negotiations, except to say we again asked Scripps to return its programming to their viewers and unfortunately they did not agree.”

At the Citigroup Global Media & Telecommunications conference in San Francisco last week, both Scripps chairman and CEO Ken Lowe and Cablevision CEO James Dolan tried to state their cases. Lowe reminded the audience that Scripps accepted low fees for Food and HGTV earlier in the decade with the understanding that as the networks grew, so would their compensation.

Scripps chief financial officer Joe NeCastro, speaking at the same conference, said that for the most part, every distributor with the exception of Cablevision has agreed to the increased carriage fees.

“We have accomplished what we set out to accomplish on the Food Network renewals: We had been looking for a significant increase to bring it more in line with what we were being paid for HGTV, maybe a little bit better,” NeCastro said. “We were looking for a certain shape to the step-up curve. By all accounts, with one notable exception, we certainly have accomplished our goals.”

According to cable executives familiar with the negotiations, Scripps has landed deals with the National Cable Telecommunications Cooperative at the higher rate and is close to a similar deal with Time Warner Cable.

According to SNL Kagan, Food had been getting about 8 cents per subscriber per month while HGTV was getting about 13 cents. It is believed that Scripps is asking for about 25 cents per subscriber per month for both channels.

At the Citigroup conference, Dolan focused on the overall impact of escalating programming costs, warning programmers that they could go the way of the music industry if they continue to push for accelerated fee increases.

“I worry more for the programming business that they don’t make the same mistakes the music business did and allow a disruptive technology or government intervention to come in and then undermine the overall economic model,” he said. “They’ve got to watch it too. This is going to be an interesting next five years.

“Are we going to see an $80 or $100 bundle for basic service? That is not completely out of the realm of possibility with the kind of acceleration we’re seeing in fees.”

He added that niche networks are increasingly vulnerable.

“Networks like Food Network, with a limited amount of audience, if they had to go a la carte or on demand, that would completely destroy their model,” Dolan said. “They’ve got to be concerned with that.”

CARRIAGE FEE

SOURCE: Collins Stewart media analyst Tom Eagan
Fun Fact No. 1: At a proposed fee increase of 50 cents to 75 cents, Cablevision could lose between 10,000 and 20,000 subscribers in the Scripps dispute without suffering an economic loss, assuming it passes 50% of that additional cost onto customers.

CARRIAGE FEE FUN FACT

SOURCE: Pali Research Media analyst Rich Greenfield
Fun Fact No. 2: Cablevision is currently paying about $9.2 million annually for Food Network and HGTV. A 100% increase in the carriage fees for Food Network and HGTV would boost those charges to $18.4 million (equivalent to the cash flow generated by 26,000 customers in a year). A 200% increase (which Cablevision claims Scripps is demanding) would equal $27.6 million (or the cash-flow generated by about 39,000 customers).

 

March