News

Primer on Dropping Nets Could Draw Lots of Ops

10/13/2002 8:00 PM Eastern

The National Cable Television Cooperative, which represents small operators, in January will conduct a panel discussion you're not likely to see at other cable-industry gatherings: It will offer its independent MSOs tips on how to go about dropping a cable network.

The NCTC isn't advising its members — who collectively have 14 million subscribers — to pull any networks from their channel lineups, according to Frank Hughes, the buying group's senior vice president of programming.

But as rising program fees put a painful squeeze on small cable operators, the NCTC thinks the panel might be a necessary service.

It's meant to educate co-op members in the event they opt to drop a network to cut costs.

"We're not advocating it; we're not telling people to do it," Hughes said. "But if they feel threatened by license-fee increases that are out of line, we're saying, 'Here are other operators and what they've successfully done [when they dropped networks].' We'd like those panelists to explain what steps they took locally, in their communications to customers, their strategies and public relations."

Hughes and a number of cable operators are predicting that network drops will be on the upswing in the coming year or so, for a variety of reasons.

For one, the tough economy — cable stocks have been pummeled on Wall Street — is forcing MSOs to be more cost-conscious. And programming fees are a major expense that can be trimmed.

"The vast majority of our networks perform for us and do a great job," said Cox Communications Inc. vice president of programming Bob Wilson. "And I can count on probably one hand over the years the networks that we have dropped. It's an infrequent decision.

"But that said, the environment is much tougher now. We have to expect it will happen more often than it has in the past."

There are other reasons why operators might be more likely to switch out one cable network, at the expiration of its contract, for a cheaper service.

A number of MSO officials, both in public and private, cited Cablevision Systems Corp.'s refusal to carry Yankees Entertainment & Sports Network — a regional sports service with exclusive TV rights to 130 New York Yankees regular-season baseball games — as firsthand proof distributors can survive when they refuse to carry expensive sports services, once sacrosanct.

"It's [the YES standoff] probably startling to ESPN," one network affiliate-sales veteran said. "That's where the nerves would probably be the most sensitive right now to what's going on in New York City."

Operators are also complaining that during contract renewals, some programmers are refusing to allow their networks to be moved to digital packages or tiers. These services are demanding continued analog carriage — or nothing. In other words, they're rolling the dice and risking a total drop.

"Many programmers are taking a very hard-line stance on migration to digital," said Patrick Knorr, general manager of Sunflower Broadband in Lawrence, Kan. "So everybody is forcing their poker hands, everybody's calling.

"So I do anticipate some very hard decisions on marginal programming. I'd really like to take a middle road with niche programming, and say, 'OK, let's move it to digital and help anchor and strengthen our digital package.' "

Not 'free' any more

On top of all that, operators are suffering sticker shock because networks that launched a few years ago with free periods of carriage — "free heroin," as one MSO executive put it — are now negotiating for contract renewals.

Those new deals often include hefty license fees, with double-digit annual increases tacked on. MSOs are thinking long and hard about continuing to carry those networks.

There have been a small batch of headline-grabbing cable-network drops in the past year. Just this month, Cablevision began to drop TV Guide Channel, replacing it with the cheaper Zap2It in about 1 million homes. The MSO claims the move has nothing to do with cost, although TV Guide Channel argues otherwise.

Early this year, EchoStar Communications Corp. dropped ESPN Classic from its Dish Network direct-broadcast satellite platform, and was about to pull ABC Family from its lineup. The Walt Disney Co., parent of the two networks, went to court for an injunction, claiming breach of contract. The dispute was eventually settled, with ESPN Classic reinstated and ABC Family kept on.

And last year, Charter Communications Inc. dropped ESPNews in a battle over the programmer's decision to stream some of its content over the Internet. The sports-news network never returned to the MSO's systems.

The NCTC's panel on network drops will be part of the two-day calendar of events for its annual winter educational conference. In its member newsletter this spring, the co-op also presented two case studies in which operators explained how they went about dropping two networks.

"I see more [network drops] on the horizon unless license-fee increases subside somewhat," Hughes said. "Our co-op members are going to be forced into making tough choices as to whether a service is worth what a programmer is asking. All we're trying to do is arm our members with this in the event something like this happens, here is an option."

Nets seem unworried

Cable-network executives pooh-poohed threats that more networks might be dropped, claiming distributors' talk is all saber-rattling and posturing.

MSOs are afraid of their DBS rivals, and in today's competitive environment, they have to offer consumers the same networks that DBS does, according to programmers.

Operators also remain loath to anger subscribers by dropping a network, since even the smallest niche service develops a following.

"Outright drops piss too many people off," one affiliate-sales official said.

And with major distributors in the midst of mergers that are under government scrutiny — such as the Comcast Corp.-AT&T Broadband and (now apparently scuttled) EchoStar Communications Corp.-Direc-TV Inc. deals — huge players are not going to risk drawing attention and negative press by dropping any networks, several cable-programmer officials said.

In some cases, a cable operator's ability to drop networks is severely limited by retransmission consent and bundling by programmers, according to operator and network officials. MSOs must distribute certain cable networks in order to get permission to carry TV stations owned by media conglomerates.

And through bundling, operators get a price break on popular networks by agreeing to carry marginal, less popular ones owned by the same programming fiefdoms.

The Cablevision-YES standoff shouldn't embolden cable operators, nor does it mark a watershed in terms of sports programmer-MSO relations, according a variety of cable-network officials.

Programmers said that particular situation — in which Cablevision has lost thousands of subscribers, and is being sued by YES on antitrust grounds, but seems to have survived the storm — is unique for a variety of reasons.

And the YES scenario is a case in which an MSO has declined to carry a startup network, which is far different from dropping an established service, programmers pointed out.

ESPN, Fox execs' take

Both Sean Bratches, ESPN's executive vice president of affiliate sales and marketing,
and Lindsay Gardner, executive vice president of affiliate sales and marketing for the Fox Cable Networks Group, described the Cablevision-YES dispute as an aberration that doesn't mark any sea change.

"It's an isolated incident," said Bratches, noting that ESPN is a very different programming service than YES.

"ESPN is a network that is not comprised of one sport or one team," he said. "We televise over 65 different sports, sports news and information, and ESPN Original Entertainment programming. Our affiliates rate ESPN as No. 1 in terms of being the most valuable basic network, No. 1 in terms of subscriber acquisition, perceived value, subscriber retention, and in terms of local ad sales."

Gardner said the YES dispute has caught his attention, and he is following it. But he also thinks it's an anomaly, because YES is demanding basic carriage from an operator that typically offers sports programming on a tier.

"In the case of New York, YES is trying to get Cablevision to change its whole paradigm of how it markets regional sports channels," said Gardner, who sees those networks as valuable local programming.

Another affiliate-sales official also described the Cablevision-YES standoff as "a unique fight," because Cablevision — owner of regional-sports rival Madison Square Garden Network — and its ruling Dolan family lost Yankees rights to team owner George Steinbrenner, who then sought $2 a subscriber per month for YES.

"They're [the Dolans] angry," the affiliate-sales official said. "This is a personal thing. And it is different to not carry something rather than drop it. This is a new network."

But many operators disagree. They said the lesson to be learned from YES is that cable operators can in fact successfully survive refusing to carry a sports service.

"It's a great example," Hughes said. "If in that market [New York] Cablevision can withstand not having the Yankees — in first place, one of the most successful teams in the league — that should be encouraging to everybody."

Added Wilson, "What that whole scenario has done, I think, is encouraged operators about their ability to make those kinds of decisions."

Cable one's criteria

Cable One Inc. has dropped "at least three" networks over the past years, according to Jerry McKenna, the MSO's vice president of strategic marketing. The issue is so sensitive that McKenna and several other operators interviewed by Multichannel News
would not identify which networks they have eliminated.

"There is pain [when a network is switched out], there's no getting around that," McKenna said. "On the other hand, no single network is indispensable."

Cable One examines a set of criteria when an affiliation contract comes up for renewal, according to McKenna. It all comes down to the perceived value of the programming: Is it worth the license fee?

"We look very closely at Nielsen ratings, at the trend," McKenna said. "If something is sliding dramatically and is in the 0.2 range, we really look long and hard at whether this is a service we should be giving a significant amount of our bandwidth to, versus other options."

The other factor that Cable One takes into account is whether a network wants a rate increase that's above the Consumer Price Index.

"We are very committed to keeping our program costs at CPI increments," McKenna said. "If a network comes in with a dramatically higher rate increase, we will take a very hard look at how important that network is to us and our customers. In instances, we have dropped networks."

That approach is very similar to the one taken by Millennium Digital Media LLC.

"Almost every deal that comes our way is not only above CPI, but the programmer is asking for multiples of CPI," said senior vice president of marketing Peter Smith. "So we're having a lot of difficult discussions.

"We really don't have a choice because if our core business is to be viable in the years to come, we not only have to slow the increase in programming costs, we have to turn it around and cut programming costs on a real-dollar basis," Smith said. "The only time you can do that is when a contract comes up for renewal. What I tell a programmer is it's nothing personal — it's just your turn in the barrel, because your deal is up."

Some other drops

In early 2001, Univision pulled its signal from Buckeye CableSystem in Toledo, Ohio, due to a license-fee dispute. The small MSO, which has 155,000 subscribers, wound up replacing Univision with a cheaper Spanish-language service, Telemundo.

"It was a more reasonable deal, and I think the programming is equal," said Allan Block, managing director of Block Communications, Buckeye's holding company. "We're going to have to take channels off if programming-price increases are too extreme, and we have done that."

From 1997 to 2000, small MSOs switched out CMT: Country Music Television and replaced it with a less costly service, Great American Country. At that time, CMT lost millions of subscribers, although its distribution is booming this year, under the new ownership of Viacom Inc.

Despite any MSO threats about stepped-up network deletions, programmers maintain it's just too risky for cable operators to raise subscriber ire that way.

David Meister, now CEO of The Tennis Channel, said things haven't changed much since the late 1980s, when he was head of the Financial News Network. FNN faced a new rival, CNBC, and was getting switched out.

At the time, there was "spontaneous picketing" in markets like San Diego, where retirees were big fans of FNN, according to Meister.

"The reality is once you launch a service, that service has a constituency," he said. "When you take it off, they get cranky. I don't think any cable operator wants to jeopardize their subscribers' well-being. It's not practical for a cable operator to take something away."

CNBC later bought and shut down FNN.

But officials at both small and large MSOs are starting to take the position that they'll risk the heat from dropping a network that's not worth its price, just like a broadcast network might cancel a low-rated show with a small but vocal fan base.

Cox's Wilson, for example, agreed public reaction to a network drop is "always a concern" that has to be weighed.

But "to a certain extent, we need to operate like broadcast networks have in the past," he said. "They have not been hesitant at all to yank a program off when it's not performing. They get calls and they get viewers saying they want them to bring the show back, but for them, it's a price-value relationship."

Rather than take the drastic step of dropping a network, distributors have other ways to pressure and retaliate against programmers, sources noted.

"You can string them out and drag out renewal negotiations, and just keep carrying their network at the old rate," one MSO veteran said. "Or you can refuse to launch their new services, or change their channel positions."

Tiers and migration

And rather than deleting a network, a cable operator can seek permission to offer pricey programming services on digital or à la carte. That way, only subscribers who really want them must pay for them.

For example, Time Warner Cable is creating sports tiers.

"We are examining all of our options as programming costs continue to escalate," said TWC executive vice president of programming Fred Dressler. "Clearly, as license fees escalate, we need to be sure these networks are available to viewers who want them without having to charge all viewers higher rates.

"That would suggest the creation of special-interest digital tiers, such as the sports tiers our divisions are developing this year and next."

In addition to developing sports tiers, Time Warner hasn't been shy about migrating networks to digital. Last fall, it moved ABC Family to digital from analog in Orlando, Fla.

Networks that aren't performing well — that aren't posting at a least a 1.0 rating — are vulnerable, and likely to lose their analog berths and be migrated to digital, according to Court TV executive vice president of affiliate relations Bob Rose.

"Performance based on ratings, public-service value, local-ad sales return, price and product differentiation — distinctiveness — should preserve or earn you long-term analog positioning," Rose said. "If you're a 0.3 network or less, and you're not delivering some public-service strengths, 6 megahertz is probably too much bandwidth to dedicate to it. You're a digital candidate."

But operators like Knorr said programmers are taking a hard line on digital, adopting an all-or-nothing position — either analog or no carriage at all.

One cable-network official said that programmer-distributor relations have grown much more rocky. That's because in the past, when MSOs raised their rates, they would add networks to their program lineups to justify the move — a plus for programmers.

But today, MSOs are focusing on new services such as modems, digital-cable boxes and video-on-demand.

"The relationship between the programmer and the operator is getting more contentious, mostly because our interests are beginning to diverge," the network official said.

Another programmer said that cable operators just have to adjust to the fact that they can no longer expect 40 or 50 percent margins: They have to settle for numbers in the 17 percent range now.

But smaller operators, like Millennium's Smith, complained that for them, expanded basic service is becoming "a loss leader," and they can't afford to stay in business that way.

Coming next week: Multichannel News will chronicle the aggressive strategies — platitudes about MSO-programmer partnership be damned — that networks employ to get reinstated when they're dropped from a cable system.

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