The Nuances of Negotiation9/26/2004 8:00 PM Eastern
Time Warner Cable isn't afraid of a fight. It has been at the center of several programmer-distributor squabbles that have played out in public, most recently a dispute over Cablevision Systems Corp.'s Madison Square Garden Network in New York. The MSO dropped MSG Network and Fox Sports New York for nearly 10 days in August until reaching an interim agreement. The gatekeepers guiding who gets — or is denied — access to Time Warner's 10.9 million subscribers are executive vice president of programming Fred Dressler and his lieutenant, senior vice president of programming Lynne Costantini. Dressler and Costantini recently sat down with Multichannel News editor at large Linda Moss at the MSO's Stamford, Conn., headquarters to discuss a wide range of issues. Dressler and Costantini touched on: Time Warner's deals with The Walt Disney Co. and ESPN; the MSO's strategy regarding sports tiers; its appetite for new linear networks; its philosophy on paying for HDTV and video-on-demand content; and whether it will ante up cash for retransmission consent. Dressler and Costantini talked philosophically about regional sports channels such as Madison Square Garden Network, and where they should be carried, and about Time Warner's displeasure with networks radically changing their formats (litigation over the issue is pending between the MSO and AMC). An edited transcript follows.
MCN: You have just come out of a dispute with MSG that is being worked on right now. (New York State Attorney General Eliot Spitzer hammered out an interim arrangement between Time Warner and MSGN that keeps the network on the MSO's lineup while a final deal is negotiated.) Big picture: What do you feel is the state of relations between programmers and distributors?
FRED DRESSLER: I don't think they're significantly different than they've been for the last decade. It's a little bit tougher now, because the networks are also maturing. They were a little easier to deal with a few years ago when they still had a lot of growth coming from the satellite industry. But now that a subscriber gain by satellite is a customer lost to cable, they're not seeing that growth. And so we're all scrapping over the last few pennies in order to meet the projections that we all have.
MCN: You did a very comprehensive master-carriage deal with Disney back in 2000. Where do you stand with that ABC Disney Cable Networks contract?
DRESSLER: We have long-term deals in place for all of Disney's products, except ABC Family, so we have been in negotiations with them about an ABC Family deal. And it's hard for me to characterize it, other than to say we're in negotiations. You know, you don't have a deal until you have a deal. So we're talking to them about an ABC Family deal and what other elements are included or not included is yet to be determined. But we have many, many years to go on all the other Disney networks, including ESPN, the Disney Channel, retransmission consent.
MCN: Cox Communications Inc., Cablevision Systems Corp., a number of operators redid their ESPN deals earlier this year — contracts that called for, broadly speaking, 7% annual rate increases, much less than 20%. Your big master Disney deal back in 2000 covered ESPN and spinoffs, and it is a long-term deal. Are you talking to ESPN about going back in and doing a deal similar to Cox?
DRESSLER: We don't necessarily have to reopen the deal to get the lower increase.
MCN: OK. So do you have a most-favored-nations clause?
DRESSLER: You know I can't discuss the terms of the contract.
MCN: I have to ask.
DRESSLER: I gave you my comment.
MCN: OK. What do you think about leagues starting their own networks, the NFL Network, Major League Baseball …
DRESSLER: Why should they be different than anybody else? [Laughter.]
LYNNE COSTANTINI: Everybody else is starting a network.
MCN: For you, as an operator, is it a good thing, bad thing?
DRESSLER: If they could come up with an idea to serve the passionate fan, then there's room for them. As long as we're serving customers and giving them something that they want, then there's room for a new network. But we anticipated this a long time ago when we came up with the idea of digital sports tiers.
Our concern then was reflective of the fact that sports costs were getting out of control, not just for the existing networks but the constant creation of new ones.
Most of the research that I have seen through all the years that I've been in the cable industry is that there's a core — 13 to 20%, depending on the market, somewhere in that range — of people who are really, really passionate about their sports. And we should serve them passionately. But I don't think that the other 80 to 87% of our customers need to continue to have their prices go up because 15% of the people want more sports. So we created these sports tiers.
MCN: How many markets are they in now?
DRESSLER: They're in virtually all of our markets. We've created a home for these networks, and we're happy to talk to all of the leagues about being positioned on those networks for carriage.
MCN: What kind of a penetration are you getting on those tiers?
DRESSLER: It's too early to tell.
COSTANTINI: It really varies.
DRESSLER: Most of them were launched this year — and also they're not fully loaded yet. It took us awhile before we added the NBA channel [NBA TV]. Now we're talking to some others. It took awhile before we put CSTV, College Sports [Television], on. So we're still populating the tier.
MCN: Do you really have any realistic hope of moving those pricey regionals onto those sports tiers?
DRESSLER: It's going to be very difficult to move existing networks — that have cost structures in place and a following on the level of service that they're on — followed on by the Cablevision-Yankees [Entertainment & Sports Network] dispute and the outcome there. It makes it more difficult, like I say, for the existing distributed networks.
New networks, on the other hand, we're more hopeful that we'll be able to do that. If there isn't a model for the network that way, then maybe there isn't room for the network.
MCN: That said, are there any hopes of perhaps moving MSG over to a tier like that?
DRESSLER: Hope springs eternal. [Laughter.]
MCN: Doesn't it always.
DRESSLER: Don't misunderstand. That's our goal, and it will continue to be our goal.
MCN: To move the regionals over?
DRESSLER: To move the regionals. But, you know if you see us do a deal where a regional stays on CPST [cable programming service tier, or the basic tier], or we do a deal with somebody new where it goes on CPST, it doesn't mean that we've given up hope on that. We still think that's the right thing to do. But every negotiation is a new negotiation. And there are a lot of factors involved in making that decision.
MCN: Cox and Comcast Corp. have gotten into the regional sports business. Is that something that Time Warner would do? Would you partner with the Mets?
DRESSLER: We would consider any kind of relationship that made product available at the right cost to our customers.
MCN: So nothing's out of the realm of possibility?
MCN: Down in Charlotte, Bob Johnson's Carolinas Sports Entertainment Television (C-SET) is launching on digital basic. Apart from putting a regional on a tier, how open are they to going digital? You were successful in that case, with that service, C-SET, launching on digital.
DRESSLER: Well, they were reasonable people to work with, and we were able to make an accommodation in the deal that seems, at that moment, to work for both parties. The Twins in Minnesota were not willing to accede to that position, and they ended up without a network.
It's important to understand, we're not religious about this. We have a preference. We have a leaning. We have a desire based upon what we see our customers want and what we think the products are going to cost. But at the end of the day, we think we're reasonable deal-makers, and we try to get products for our customers that they'll want at reasonable prices.
We need to offer the widest variety of choices at the best possible prices so that our customers get what they want. And we need to, we continue to, experiment with the right way to do that. We've had analog tiers, and we've melted them down. And we've started digital tiers. And now we've got multiple tiers in the digital world. And some things are a la carte, and some things are packaged.
You know, we're trying to compete in a very, very difficult environment these days. And we need the flexibility to offer our customers the maximum amount of choice at a good price.
MCN: How are your Hispanic packages and tiers doing?
COSTANTINI: They're doing fairly well. They're rolled out pretty much across the company. Some of our divisions are experimenting with tiers that consist of some English-language and some Spanish-language packages, just to see what the consumer preference is. Because we know, based upon the research, that not all Hispanics want only Spanish-language programming; they watch the ESPN and they watch the MTV networks, and they like all the different English-language networks, as well.
MCN: What's your appetite for linear networks right now? Some MSOs say that there's no interest.
COSTANTINI: It's a tough environment for new linear networks. But it's not impossible. If there's a niche to fill, and there's consumer demand, and it's a competitive product — one that we think we need to have — of course we're going to consider that in the interest of the consumer and giving them choice and packages and programming. But it is a little more difficult, because there are bandwidth constraints, and there are cost constraints.
So we've encouraged a lot of the new networks to consider alternative models, perhaps an SVOD model, so that we can offer the product on demand and exploit our technological platform.
DRESSLER: We just got finished talking about sports linear networks and Hispanic linear networks. So we're talking about lots of linear networks. If what you're talking about is just another movie channel, the answer is maybe we don't need just another movie channel. But when people say it's hard to get a linear network launched, I don't think that that's true.
MCN: Have you spoken to anyone at MTV about Logo yet, the gay network?
COSTANTINI: We've been in discussions with them as well as other networks that have product targeted to the gay and lesbian demographic, which we think is probably underserved.
MCN: And Comcast has on the drawing board a preschool network. What do you think your interest level is?
DRESSLER: Personally, I think that there is a need for preschool programming on-demand much more than on the vertical network. Kids at that age like to watch the same show over and over and over again. So I think that on-demand is a perfect opportunity for that kind of programming.
Parents would love it, rather than having to say to the kid, 'Well, you watch that show, and it's on again tomorrow at 9 o'clock in the morning.' And they could watch the show again and again. It seems to me kids would like it, and the parents would enjoy it.
MCN: Comcast, in its second-quarter conference call, was talking about program-cost increases this year. And they said they would be down to 5% this year versus 12% last year. And when Time Warner did its second quarter call, it said that your programming cost increases were 15% last year, 12% in the second quarter this year, and were anticipated to be under 15% for the full year. What's that 15% driven by? And is that something that's going to decrease in the next couple of years?
DRESSLER: Well, rate increases are definitely decreasing. It's important to understand, if you take a look at our channel lineups compared to most other cable operators, that we offer more product. So when our rates are going up, it's a combination of rate increases and adding more product. So you've got to be careful when you're comparing apples to oranges.
So on the other hand, I would say when I see the Comcast programming costs, and I don't think it's the rates that they say are going up by 5%, they say programming costs …
MCN: Programming costs, yeah.
DRESSLER: … are going up by 5%. I'm a competitive person; I see that as a challenge, and I would intend that we try and get ours down in that range or better.
MCN: Is there a philosophy that rate increases shouldn't be higher than CPIs [the Consumer Price Index]?
DRESSLER: There are lots of rules of thumb and benchmarks. But every negotiation is a unique set of circumstances. And if all you run is re-purposed programming, off-network stuff that's 20 years old, whatever, then having costs go up by more than the CPI just seems out of line.
On the other hand, if you're in the sports business, I understand where the cost of players' salaries and everything else involved in that area is greater. It's been, in the sports situation, completely out of line, but I don't think you can expect to hold it necessarily to CPI. And everybody else probably falls somewhere in between.
MCN: What is Time Warner's policy in terms of two issues with broadcasters: either paying cash for retransmission consent or paying cash for HDTV signals?
DRESSLER: Well, from the very beginning of the whole must-carry retransmission consent, we've taken the position that we would not pay cash, and we have never paid cash.
DRESSLER: And we have no intention of doing so.
MCN: Next October is when all operators will be getting notice about retransmission consent and how the stations are opting. How do you think the next round of retransmission-consent talks are going to go? Broadcasters like Emmis Communications Corp. have made a lot of noise about wanting cash.
COSTANTINI: In the past, we've been pretty creative in the deal making. And we find items of value to trade back and forth. Our position is going to be what Fred said earlier — we're just not going to pay cash. And we'll try and find other alternatives.
DRESSLER: With regard to high-def, our position has been and continues to be that we won't pay for repurposing product or simulcast product.
If somebody comes along with a new network, as has Mark Cuban with HDNet and as In Demand did with [INHD], then we would pay for a new network, much as we would in the analog or digital-basic lineup world. But we don't see where paying a second fee for the same content, if you will, makes any sense for the consumer.
MCN: I know what the philosophy is on HD content. What about VOD and SVOD content?
DRESSLER: VOD and SVOD are different [than HDTV]. I see them as different because the industry has, historically, dealt with windows and different purposes. The HD/standard-definition analogy is that they're both linear networks; they're both being offered in exactly the same time. And if a customer chooses to watch it on channel 1 versus channel 2 is not really relevant.
When you're repurposing the programming and making it available in an on-demand timeframe — and the networks lose potential advertising as a result of that, and/or it becomes devalued because there isn't a secondary or tertiary market for the product in the syndication window because you've made it available and people have recorded it on their PVR or they've had access to it on a SVOD or VOD basis — I see that as a completely different set of circumstances than looking at the HDTV situation.
MCN: Programmers should be compensated for that?
DRESSLER: If there is a business opportunity for the cable operator to make more money, then it's naive to think that the networks are going to give you the product at no cost. But there are lots of ways to be compensated. Whether it's in the basic license fee or a separate fee is up to the negotiating process to figure that out.
There are some cable operators who think that they should have lots of content for free. Like I say, nothing is free, you just find another way to compensate them for it — whether it's additional distribution for a new network or higher rates for the existing network or some other model. But you can't get people to continue to produce product — that people want to see — for free.
COSTANTINI: But there's a place for free VOD. And we do want to provide more functionality to our customers because we want to remain competitive vis à vis dish. We're just continuing, from a technological point of view, to offer more and better choices and value to the customers by employing a lot of different functionalities: a better guide and user interface experience; a better SVOD experience; more options on how and when to watch programming; more options on the kind of programming.
MCN: What's your mix in terms of SVOD versus free VOD?
COSTANTINI: We have a couple of hundred hours on a dozen and a half or so networks that provide free video on demand, 10 to 20 hours. And then we offer, on an SVOD basis — [Home Box Office], Showtime, [The] Movie Channel, Cinemax — the usual premiums, basically. And then, clearly, lots and lots of movies and other content on a transactional basis VOD. And what we're starting to test high-definition VOD, as well, in some of our systems.
MCN: What's the model there, with HD VOD?
COSTANTINI: We're testing a transactional model in a couple of divisions, right now. But to be able to watch action films…
MCN: Would this be for movies?
COSTANTINI: Right now it would be movies. It wouldn't necessarily be limited to movies in the long run.
But to be able to watch a Lord of the Rings in HD, on-demand would be a pretty neat experience and one that can't be duplicated by our competitors.
DRESSLER: The important point to make here is nobody knows what the right model is yet [for VOD].
If what Comcast is doing turns out to be right, we'll be happy to copy them. Same thing with Cablevision: If what they're doing is right, we'll copy them.
Nobody knows what the right model is for compensating the networks yet. We're all just finding our way and tiptoeing along here trying to figure that out.
The problem is that sometimes the way the stuff is written about or the way the networks talk about it on these panels is as if, when you try something, then that's the model that's set in stone. And the answer is that's not so, and we don't view it that way.