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Clash and Carry

How The Cablevision-Viacom Brawl Shows Why You Can't Just Get What You Pay For 3/03/2013 7:00 PM Eastern

Cablevision Systems, the ninth-largest pay TV distributor in the U.S., took aim at programmers’ longstanding practice of bundling less-popular channels with those that consumers really want to watch, suing content king Viacom in federal court last week.

The lawsuit, filed last Tuesday (Feb. 26) in U.S. District Court for the Southern District of New York, swirls around two of the most contentious issues for cable-TV customers today: the rising cost of multichannel-TV service and the bundling of channels. And it immediately drew battle lines in the industry — larger cable operators lined up in support of Cablevision.

But who wins this battle, which has a long history in the courts, might matter less to Cablevision than the antitrust suit’s mere existence.

The chances aren’t good that the MSO will blow up what for decades has been the cornerstone of the content distribution model, according to many observers. The true benefit to distributors lies in the prospect that a lengthy court battle could keep the spotlight shining brightly on the issue of high programming costs for months, and possibly years, to come.

GLOVES COME OFF

The suit is the latest distributor effort in the past several years to rein in programming costs — and blame programmers. Late last year, Time Warner Cable chairman and CEO Glenn Britt threw down the gauntlet, stating that the nation’s second-largest MSO would think hard about carrying marginal networks with low ratings. He made good on that promise in December, dropping lightly watched arts channel Ovation.

Other recent efforts have centered on rising sports-programming costs, with three distributors — DirecTV, Cablevision and Verizon Communications — charging subscribers sports surcharges of between $2.42 and $3 per month to offset what they called an out-of-control cost structure. More distributors are expected to follow suit.

Sports networks were the early target of most MSOs’ ire, mainly because they are the costliest. ESPN, according to SNL Kagan, charges distributors an average of $5.26 per subscriber, per month. Regional sports networks have seen their fees skyrocket over the years, and the recent launch of Time Warner Cable SportsNet (which carries Los Angeles Lakers games), at an estimated $4 per subscriber per month, as well as the Los Angeles Dodgers-owned RSN coming next year, have only heightened the rhetoric around the issue.

In its suit, Cablevision claims it wants to buy only eight core Viacom networks — MTV, MTV2, Nickelodeon, VH1, Spike, TV Land, Comedy Central and BET — but is being forced to buy 14 additional, less-watched channels, such as Palladia and VH1 Soul. The MSO wants its December 2012 carriage deal with Viacom voided, and seeks “a permanent injunction barring Viacom from conditioning carriage of any or all of its core networks on Cablevision’s licensing any or all of Viacom’s ancillary networks,” as well as treble damages and legal fees.

Viacom defended the policy, suggesting it was helping out cable operators and other distributors.

“At the request of distributors, Viacom and other programmers have long offered discounts to those who agree to provide additional network distribution,” Viacom said in a statement.

“Many distributors take advantage of these win-win and pro-consumer arrangements. Reflecting the highly competitive cable-programming business, these arrangements have been upheld by a number of federal courts and on appeal.

“Viacom will vigorously defend this transparent attempt by Cablevision to use the courts to renegotiate our existing two-month-old agreement,” the company said.

Several cable operators threw their support behind Cablevision last week, including Time Warner Cable, Charter Communications and Mediacom Communications.

The American Cable Association, which represents nearly 900 small and mediumsized operators across the country, has been a staunch opponent of tying and bundling channels in carriage agreements.

“It’s a problem not just for Cablevision, but also for hundreds of small and mediumsized cable operators,” ACA president Matt Polka said in a statement. “If the courts can address this problem, then we believe this would be a good outcome for consumers.”

Smaller independent networks were also understandably pleased with the development.

“The aggressive stance taken by large media conglomerates leaves less room and money to go around for independent, vibrant programmers that serve smaller, but passionate audiences that love and want the family-friendly programming offered on GMC and Aspire,” GMC vice chairman Brad Siegel said in a statement.

The industry’s concerted and collaborative effort behind the programming-cost issue is in stark contrast to its missteps in the past, particularly during the early days of retransmission-consent negotiations and cable-channel blackouts. Cable took it on the chin in the 1990s, as programmers consistently painted distributors as the villains in carriage disputes. In the past few years, though, providers have taken the initiative, getting out in front of the issue by highlighting rate increases that sometimes reach triple digits, and correctly informing customers that blackouts are a contractual obligation when programming deals expire.

In that context, the Cablevision suit is a natural progression of those efforts. It also may serve as a salve to ease customers into future monthly cable-service rate increases by showing that escalating programming costs, not cable-system greed, are driving retail prices.

“To be sure, there’s a lot of blame to go around when it comes to high cable prices,” Public Knowledge senior staff attorney John Bergmayer said. “Cable companies themselves benefit from an uncompetitive market that allows them to pass along costs to consumers and keep prices high. Broadcasters also have rules that force cable subscribers to subsidize them.

UNKNOWN CONSEQUENCES

“It’s hard to predict exactly how an antitrust suit like this will turn out, but hopefully it will at least shed light on industry practices that harm consumers,” Bergmayer added.

This is not the first time that the industry has tried to force unbundling of channels. In 2011, a group of distributors, including Cablevision, accused programmers of violating antitrust laws by tying less popular channels to deals for must-have networks. A federal appeals court ruled in favor of the programmers, adding that channel bundling offers no threat to competition.

Last Thursday, on Cablevision’s fourth-quarter conference call with analysts, CEO James Dolan explained that the most recent suit is different, because it attacks wholesale bundling.

“Retail bundling has been going on for quite some time — Charles Dolan was one of the first to ever do it,” the younger Dolan said of the Cablevision founder and chairman. “It was really designed to provide more value to the customer by giving them a lot more product at a better price. That is not what this lawsuit is about.

“This is about wholesalers forcing in product into retailers, taking up shelf space and stopping the retailer from the ability to add other products, and forcing the price up,” Dolan said.

That change in semantics may have little sway in the courts, according to Washington University law professor John Drobak. Drobak, the George Alexander Madill Professor of Law, Professor of Economics, and Professor of Political Economy at the St. Louis-based university’s School of Law, said that tying is generally one of the more difficult concepts to prove in an antitrust case, because it has to show either harm to competitors or to consumer choice.

On the consumer side, Drobak, who said he has no direct knowledge of the case, added if Cablevision could show that being forced to carry the Viacom channels prevents it from carrying others — i.e., it was left with no additional channel space — that could help its argument.

“If capacity were a problem, that would hurt competitors of Viacom,” Drobak said. “The higher the price Viacom charges, the better off Viacom’s competitors are. You can’t argue a high price by Viacom hurts competitors of Viacom.”

Overwhelmingly, consumers have a notion that by only buying the channels they want, the price will be lower. But even if Cablevision was to prevail and bundling becomes a thing of the past, it ultimately would have little to no effect on rates, according to Sanford Bernstein media analyst Todd Juenger.

In an October report, Juenger wrote that unbundling networks would just force programmers to charge more for their popular channels.

That could mean that charges for ESPN, currently the priciest network at $5.26 per subscriber per month, according to SNL Kagan, could balloon to $30 per month. “Ask any ESPN viewer — that’s still a bargain to them,” Juenger wrote. “Niche networks today that cost literally nickels and dimes per month could easily be priced at about $5.”

Cablevision has done a flurry of carriage deals in the past several months — with programmers including ESPN parent The Walt Disney Co. — that helped drive up its programming costs by 12% in 2012. During its Q4 conference call last week, Cablevision said programming should rise at the same pace in 2013.

Viacom is vulnerable because it has no sports programming or broadcast network, and its iconic cable channels like MTV and Nickelodeon have been experiencing recent ratings declines, Juenger added.

Wrote Juenger, “When a distributor decides to take a stand, pick a fight — Viacom is the obvious target.”

October