News

Viacom-Sized Migranbes

11/26/2000 7:00 PM Eastern

Now that Viacom Inc. has become a supersized content king-with Black Entertainment Television the next cable network set to join its fold- cable operators and other programmers are bracing for the repercussions.

MSOs and direct-broadcast satellite providers fully expect Viacom to seek substantial license-fee increases for BET and TNN: The National Network. Viacom is already floating a rate hike for TNN, which it acquired along with CMT: Country Music Television when it merged with CBS Corp.

Cable operators are also betting Viacom will aggressively use that much-hated bargaining chip-retransmission consent for CBS-owned TV stations-to drive distribution for TNN and CMT, and possibly for BET.

The prospect of hefty TNN and BET price hikes, needless to say, doesn't make distributors happy. They've been battered by a host of programming-cost increases this year. NBC hit them with an Olympic surcharge and steeper license fees for both CNBC and MSNBC. And The Walt Disney Co. offered up a double whammy: not only was ESPN's rate hiked, but operators must now pay for Disney Channel, instead of sharing in a revenue split for it.

"The reality of life is we're trying to keep our rate increases to 5 percent," said

Jerry McKenna, vice president of strategic marketing for Cable One Inc. "That dictates what our programming spending will be. The pot is not unlimited anymore."

At Time Warner Cable, spokesman Mike Luftman said: "Anytime there's the prospect of increased carriage fees, that's an issue of concern. The cost of programming has been escalating far above inflation. MSOs are not in a position to pass those along to customers. We are asking networks to depend more on ad revenue than carriage fees."

Operators aren't the only ones voicing concern about Viacom and its possible plans. Programmers-particularly smaller and midsized stand-alones-are also worried about the ripple effect as Viacom expands to become an even bigger cable-network juggernaut.

Industry insiders are also predicting that the two main start-up African American-targeted networks-Major Broadcasting Corp. Network and New Urban Entertainment Television-will have a much more difficult time in gaining a foothold once BET is part of Viacom. Cable executives expect CMT rival Great American Country to be in for a rough time, too.

That's because, in addition to retransmission consent, Viacom's MTV Networks unit is expected to bundle its new holdings with popular channels like Nickelodeon and MTV: Music Television.

Viacom could use such a move to try for rate-card increases for BET, TNN and CMT, as well as build those networks' distribution.

"That is my biggest fear with this group," said Classic Communications executive vice president of operations Ron Martin. "We have seen their digital suites bundled up so you have to take it all."

Added one programming executive: "This is all about leverage. This is precisely why BET sells out to Viacom. It will beat us up with Nick [to get BET more carriage]."

And that will leave fewer dollars on the table for other cable programmers and further squeeze an already tight distribution marketplace, some programmers complained.

VYING FOR SCARCE RESOURCES

TNN, CMT and BET are primarily analog services, and that means Viacom will be out in the field competing with other networks for valuable and limited analog real estate.

For example, Viacom will need to drum up roughly 15 million more homes to make Bob Johnson's 62.4-million-subscriber BET a fully distributed service. Viacom will also look to increase carriage for BET on Jazz, now in 5 million homes, as well as CMT, which stands at 43 million households.

Cable-industry consolidation has been going on for years among both programmers and MSOs. But Viacom's evolution into a larger powerhouse controller of content has renewed distributors' concerns.

"It scares the hell out of me," one cable-operator source said.

In their defense, MTVN and BET officials said worries expressed by operators are unwarranted.

To allay concerns about the potential bundling of BET, MTVN and CMT, MTVN and BET officials said that the African-American network will keep its own separate affiliate sales force and won't be represented by MTVN.

"BET will still retain its autonomy," BET spokesman Michael Lewellen said.

Nonetheless, when BET chairman Johnson announced his $3 billion sale to Viacom, he specifically alluded to the fact that gaining distribution had been "even more difficult" without "the regulatory benefit of retransmission consent."

And Viacom is expected to make full and skillful use of retransmission consent to gain subscribers for TNN and CMT, and perhaps BET.

In the past, the former CBS Corp. was notorious for bungling any strategic use of its retransmission rights. But retrans is now a playing card in the hands of MTVN's affiliate sales force, which one top cable-network executive described as "a savvy crew that knows cable."

They aren't expected to fumble when it comes to retransmission consent. On that front, they can take their lead from Viacom's top management.

Hardly shy on the topic, in a speech earlier this year Viacom president Mel Karmazin flat-out said his company would use retransmission consent as a tool to increase carriage for its cable-network stable. Viacom has already used CBS retransmission consent for deals with DBS providers this year.

"Viacom is aggressive with a modicum of leverage," said one affiliate chief who preferred to remain anonymous. "With retransmission consent, it's the ultimate weapon. Retransmission consent is definitely the silver bullet. You can get anything."

MTVN and Viacom declined to comment on CBS' potential use of retransmission consent.

Viacom's acquisitions of TNN and CMT have already had an effect on other programmers. And it extends beyond the most obvious one to date: TNN's acquisition of World Wrestling Federation Entertainment Inc. programming from USA Network.

The WWF is the cornerstone of The Nashville Network's rebirth as general-entertainment channel The National Network.

As part of Viacom's stable, the former country-music service has already picked up 162,000 Time Warner Cable of New York City subscribers, as well as carriage on District Cablevision in Washington, D.C.

Sci Fi Channel lost out in the nation's capital. It was recently pushed to a digital tier, and TNN received its precious analog slot. Sci Fi officials declined to comment.


ALREADY WHEELING

Viacom has also made clever use of the regional sports networks it gained through the CBS merger, industry observers pointed out. Viacom sold its two-thirds stake in Home Team Sports to Comcast Corp. Under terms of that deal, the MSO agreed to boost distribution for a host of MTVN networks, including TNN and CMT.

Earlier this month, CMT announced it would launch in 4 million Comcast homes, all of which were analog. GAC was the loser in that scenario.

GAC had successfully grabbed millions of CMT subscribers when the latter network was owned by CBS. A Comcast spokeswoman said in some cases-she wouldn't say how many-the MSO switched out GAC for CMT.

Viacom officials have made a commitment to invest heavily to improve TNN and CMT programming. That's already come to pass at TNN, where Viacom has shelled out an estimated $25 million to $30 million for the WWF-five times what USA paid.

MTVN officials have told cable operators that in the not-too-distant future, they will look to put TNN's license fees on a par with such general-entertainment networks as USA Network and Turner Network Television, said one source.

There is now a wide disparity in rates for TNN, which can run from anywhere in the mid-teens to the high-20 cents a month, per subscriber. MTVN wants to lift TNN's rate to the mid-40-cent range, according to the source.

MTVN officials wouldn't discuss any specifics about TNN's carriage deals, or comment on license fees. But Nicole Browning, MTVN's executive vice president of affiliate sales and marketing, said she is sensitive to the fact that rising-programming costs are a big issue with affiliates.

"Our license fees have always been moderate, far below those of some of our competitors," Browning said. "We'll offer the services at a fair market value."

BET officials have said their network's license fee is 14 cents a month, but other sources say it's closer to the 10- to 12-cent range. Johnson has always griped that BET, as a 20-year-old network, wasn't commanding the kind of license fees or distribution that equally established services get.

BET's carriage deals with MSOs are staggered and expire in the next two to three years, Lewellen said. Operators expect to be asked for a rate increase.

"I see this thing going up to 20 cents in no time," one operator source said.

BET has ramped up its investment in original programming, and Viacom has given the service its stamp of approval by bringing it under its umbrella, according to Lewellen.

VALUE EQUATION QUESTIONED

"How that all will play out for when we sit down with cable operators remains to be seen," he said.

Distributors are not swayed by MTVN's purported argument that because it is spending more to improve TNN's programming, license fees to MSOs and DBS providers should increase accordingly.

"I'd take it with a grain of salt when a programmer says they're going to improve their programming and raise their license fees," said Michael Schwimmer, vice president of programming for EchoStar Communications Corp. "You can never pay a programmer enough. They are perpetually complaining that they're undervalued in the market."

And there is a limit to how much operators will pay for so-called "improved programming." For example, one network affiliate-sales chief said an operator recently told him that he didn't want-and couldn't afford-better programming at a higher cost.

"He told me, 'I don't want a Mercedes. I want a Chevy,'" the affiliate official said.

Classic's Martin expressed his own concerns on the subject.

"We can't continue to have better programming, and make bigger investments, and think we can pass that on to the consumer," Martin said. "We can't have everybody coming in and improving their programming.

"Sometimes we have to stop passing it through. And then it comes down to making some tough decisions."

That might mean dropping a network. McKenna said he might have to consider whether to migrate an analog cable network that wants to increase its license fee to digital.

Regarding TNN, McKenna also asked, "Does the marketplace need another general-entertainment network?"

Some operators believe programmers like Viacom improve the programming at their networks so they can raise ad rates and get more revenue that way. But MSO officials claim they don't reap any benefit from that because their license fees continue to rise.

"And if next year, TV ad revenue is soft, as predicted, that will really put pressure on Viacom to make more money off license fees," one cable veteran said.

Charter Communications Inc. vice president of programming Patty McCaskill said her MSO is always wrestling with the issue of escalating programming costs, all of which can't be passed down to consumers. She'd like to see better programming on TNN and BET, but doesn't necessarily want to foot the bill for it.

WAITING FOR IMPROVEMENTS

"What [new CMT president] John Sykes did with VH1 is a great thing," she said. "We'd like to see that magic spread around. But before we'd seriously consider a significant rate increase to a service like TNN, there would have to be an improvement beyond wrestling.

"One program doesn't make a network. I'd look at what they've done to the programming and the overall package."

If part of TNN's game plan for wrestling is to draw in younger viewers so the network gets higher ad rates, the programming service should drive revenue growth in that way, rather than by raising license fees, McCaskill argued.

One benefit of programmer consolidation-and BET's inclusion within Viacom-is that the economies of scale should reduce the cost of running the service. "That can mitigate their costs to us," McCaskill pointed out.

MTVN is known for "bundling" its networks, or giving a distributor a discount on a rate for a popular service, like Nick, in exchange for getting more rollouts for its less sought-after networks.

"You use your stronger siblings to bolster your weaker siblings," an affiliate sales executive said.

That MTVN bundling strategy has irked cable operators in the past, and still does. That's why distributors such as Schwimmer aren't happy about increased programmer consolidation, particularly at Viacom.

"It allows programmers to use their popular brands to force carriage and rate increases for what I would call services that are mediocre, at best, at delivering quality programming," Schwimmer said. "Distributors are forced to promise bandwidth, while the programmer is not going to guarantee improved customer satisfaction or improved ratings. It's a sucker's game."

Even though MTVN can use its leverage by bundling a TNN or a BET with a Nick or an MTV-and has retransmission consent for CBS owned-and-operated TV stations in its arsenal-some operators still hope the programmer won't use that clout as a "big stick" against distributors.

"MTV has been a good partner," McCaskill said. "If you have good-quality programming, you don't need a club to get distribution."

Some of CBS's retransmission-consent deals were six-year pacts tied to the launch of the now-defunct CBS Eye on People. Those deals lapse in 2002, according to one source. Another source said some CBS retransmission deals expire at the end of 2001.

Small and medium-sized networks that aren't part of a programming giant like Time Warner Inc. are fearful they'll be hurt most if MTVN is able to get price hikes-and analog distribution-for TNN, BET and CMT.

"The leverage this gives them to drive the BET rate, which I suppose is going to work, is problematic for other programmers, just from the standpoint of BET then taking a bigger slice of the pie and taking more of the programming budgets out there," one network affiliate-sales chief said.

NBC Cable president David Zaslav said that for Viacom, having "a bigger basket of services" isn't a big advantage in and of itself. Viacom's edge comes from "big brands" like Nick and MTV that it can use as currency, according to Zaslav.

"Scale is valuable. But more important than scale is owning products that have huge niche demand," Zaslav said. "The value of big brands is that you get a big pull-through from the consumer. The issue is, how do you use that currency?"

THE DISNEY IMPACT

Viacom can decide if it wants to get rate increases for MTV and Nick, or instead try to build the asset value of TNN and BET, Zaslav said. In that scenario, "mid-level" cable networks that are "more like a commodity" would see their license fees held in check, Zaslav said.

On the distribution side, programmers are already reeling from the avalanche of channel space The Walt Disney Co. secured for Toon Disney, SoapNet, ESPN Classic and ESPN2 through its retransmission-consent dispute with Time Warner. And programmers are awaiting the outcome of Comcast's ongoing retransmission-consent talks with Disney.

"Disney won its battle," an affiliate-sales official said. "That clearly demonstrates to me that there's a battle going on for real estate.

"How many slots will Comcast give to them [Disney]?

Viacom can potentially use CBS retransmission consent leverage to secure control of the best channels."

As a result, the squeeze on analog space is exacerbated by MTVN's efforts for TNN, CMT and BET.

"MTVN is as good as it gets in driving distribution," another affiliate-sales chief said. "For other networks still grappling for subscribers-since BET is analog-this is a factor. BET will be grabbing more analog real estate. It's bad news for other African-American networks."

Referring to the start-up black networks, another affiliate-sales head said bluntly, "They're dead."

Officials at NUE-TV, backed by Quincy Jones and Leo Hindery, and MBC, backed by Evander Holyfield and Marlon Jackson, both said BET's purchase by Viacom won't hurt their progress. Both NUE-TV president Robert Townsend and MBC senior managing partner Alvin James said that BET's huge $3 billion price tag shows how valuable their niche is.

"It's a tremendous plus to ethnic content providers to finally get a true valuation on of what this segment of the market represents in terms of disposable income," James said.

Both Townsend and James predict Viacom will maintain BET as more of a music-oriented service, since that's MTVN's bailiwick. Their networks are geared more toward general entertainment, both executives said.

For example, MBC has aligned itself with family-friendly advertisers and is targeting the 25-to-54 demographic, according to James.

"This is an opportunity for MBC to offer an alternative to this consumer market," he said. "We need to give blacks more of a choice on cable."

Just as BET has competitors, CMT's archrival is GAC, part of Jones International Networks. GAC gained carriage at CMT's expense by paying launch fees and offering free carriage. In response, under CBS, CMT dropped its license fees for midsized operators to 5 to 6 cents a month, per subscriber.

SUPPORT 'LITTLE GUYS'

JIN president Jeff Wayne said even though CMT plans to double its spending on programming and add originals, cable operators like the fact that GAC offers them an alternative to CMT.

Martin, for example, said he remains a fan and proponent of GAC. "We think it's a particularly good service," he said.

Cable operators need to stick behind small and midsized networks that don't have leverage because that's in their self-interest, said Fox Family Channel president of distribution John Burns.

Although it's half-owned by News Corp., Fox Family is, in effect, a stand-alone network because it doesn't have retransmission consent and isn't bundled with Rupert Murdoch's other cable networks.

"The industry really should be supportive of channels like Fox Family," Burns said.

"Otherwise, it's going to be the big guys against the big guys."

Some cable network affiliate-sales executives claimed MTVN is vulnerable in some ways, in terms of its negotiations with MSOs on TNN, CMT and BET.

CMT, in particular, is a weak link in MTVN's stable. That's partly because of GAC and because of its niche category, country music. A cable operator can fight back by using "reverse leverage," those executives said.

"This is an area where you have to be careful how you play hardball," one affiliate-sales chief said. "All MTVN's networks are not must-haves."

Added a second affiliate-sales executive: "An operator can say to MTVN, 'I'll give you a rate raise on Nick, but I'm going to have to drop CMT to make up for it. 'Can you see MTVN trying to tell [Viacom chairman] Sumner [Redstone] that? It isn't a one-sided negotiation."

Some operators and programmers also suggested that retransmission-consent has lost some of its firepower for broadcasters, because after this year's Disney-Time Warner imbroglio, no MSO would dare remove an over-the-air TV station's signal.

That leaves that decision to broadcasters like Viacom and CBS-who would then face the wrath of the public and government officials.

March