Comcast Corp. and AT&T Broadband have just barely merged, and already the MSO behemoth is looking to flex its muscles with respect to programming contracts and the development of new networks.
Looking to escape a programmer-friendly affiliate deal with Starz Encore Group LLC, Comcast last week filed suit against the premium programmer, claiming it shouldn't be governed by a controversial 25-year carriage deal struck with Broadband's predecessor company.
Separately, sources said the MSO is looking to step up its programming development and acquisition efforts, with an eye toward developing several minority and niche-targeted services in the immediate future.
Last Monday — the very day that the $54 billion merger closed — Comcast Corp. filed suit against Starz Encore, claiming it shouldn't inherit or be bound by the aforementioned long-term arrangement between AT&T and the programmer.
The complaint, filed under seal, was lodged in the U.S. District Court for the Eastern District of Pennsylvania.
According to a press release issued by Starz Encore, which was served with the suit last Tuesday, the complaint argues that the post-merger distribution of the company's programming by former AT&T Broadband systems should fall under Comcast's affiliation pacts with the programmer, and not AT&T's old deals.
Starz Encore Group chairman John Sie said the suit "is without merit and we're fighting it vigorously."
The Philadelphia-based MSO declined to talk about the lawsuit in any detail, but did issue this brief statement through a spokeswoman: "Comcast is prepared to work toward resolution of its dispute with Starz. Comcast's declaratory judgment action against Starz was filed to preserve our legal rights."
Starz sued AT&T
Starz Encore has a separate lawsuit of its own pending against Broadband with respect to the carriage deal, under which the MSO will owe the programmer a flat $360 million fee next year.
Action in that lawsuit — which Starz Encore filed against Broadband 18 months ago — has been stayed by a judge until Jan. 31, 2003, so both sides can try to settle matters.
Starz Encore filed the suit when AT&T balked at complying with the Starz Encore affiliation deal it inherited from Tele-Communications Inc. The pact, done during the watch of former TCI chief John Malone, calls for the MSO to pay the programmer huge fixed annual fees.
Those fees began with a 1998 payment of $270 million and are slated to rise to $360 million in 2003, increasing at the rate of inflation after that point.
When the affiliation deal was struck in 1997, Starz owner Liberty Media was a unit of TCI, which became AT&T Broadband after AT&T Corp. acquired the MSO.
In referring to the Starz-AT&T Broadband affiliation deal, Liberty's recently filed 10-Q notes, "The payment from AT&T Broadband can be adjusted if AT&T acquires or disposes of cable systems."
The Securities and Exchange Commission filing also said: "AT&T Broadband raised certain issues concerning interpretations of the contractual requirements associated with the treatment of acquisitions and dispositions. Starz Encore believes the position expressed by AT&T Broadband to be without merit."
Network executives believe the license-fee battle between Comcast and Starz will be more of a norm than an anomaly, as the MSO attempts to get the best and least expensive affiliation deals.
In a spring filing with the Federal Communications Commission, Comcast essentially said it planned to cherry-pick from deals with either MSO to find the ones with the lowest license fees. It also told the FCC it expects its programming costs to decline, because its larger subscriber base will trigger additional volume discounts in some existing affiliation contracts.
Comcast said it expected to save $250 million to $450 million a year in programming costs as a result of the merger.
In a brief interview after Fox Entertainment Group's annual meeting in New York last week, News Corp. chairman Rupert Murdoch said that although he has had no discussions with Comcast, he expects it to try to renegotiate programming contracts, including those for News' cable networks.
"I'm sure they will try to use the muscle that comes from their size," Murdoch said. "But it depends on the strength of the channel. There are some things they can't mess with that they would love to — ESPN and the Fox Sports networks. Those are cable networks that every [cable operator] has to have."
Another programming executive who wished to remain anonymous also said Comcast would be selective in choosing which programmers to battle with and which to leave alone.
"The first thing they're going to try and do is pick and choose [between their AT&T and Comcast carriage deals]," said the programmer. "Comcast is not going to get away with it with some people, because of their contracts, but with others they will.
"I would expect they're [Comcast] going to be careful about where they pick their fights … I don't think they're going to get in a tussle with 12 people," the executive added. "I think they're [Comcast] going to squeeze everyone, but I don't think they're going to file a complaint against a lot of people."
Industry observers also expect Comcast to be very aggressive in programming development and acquisition in an effort to build upon its growing portfolio of content.
A year ago — when Comcast and AT&T Broadband agreed to merge — Comcast said it would like to develop between one or two new programming services each year.
Comcast currently holds stakes in E! Entertainment Television, fledgling video game network G4, The Golf Channel, Outdoor Life Network and the Comcast Sports Net regional sports services in Philadelphia and Washington, D.C.
Before making its move on AT&T Broadband in July 2001, Comcast was very busy on the network-acquisition front. It traded a stake in Speedvision to Fox Cable Networks Group for full control of Golf, bought control of OLN and invested in G4.
Comcast officials declined to comment on plans for new networks, but sources within the MSO said it's focusing on integrating its newly acquired systems and not on programming development.
"Any discussion on how our content will be developed going forward is very premature," said the source.
Nevertheless, industry sources maintained services targeting the Hispanic and African-American communities are on the MSO's front burner.
On the African-American front, the network has been talking to rap music impresario Russell Simmons and former Fox Family Channel general manager Tracy Lawrence about investing in and distributing Fabulous TV, a hip-hop oriented, entertainment service.
More recently, sources said, the MSO has taken an interest in a new family-oriented urban network service aimed at 25-to-54-year-old African-Americans. The channel is headed by Radio One CEO Alfred Liggins and actor and producer Tim Reid.
A sticking point has been Comcast's won't for operational control of either network, which runs contrary to Simmons's insistence that his channel be owned and operated by African-Americans, sources said.
Neither Simmons nor Lawrence, nor Liggins and Reid could be reached for comment.
Comcast and NBC are also rumored to be talking about potential co-investment in several Spanish-language diginets. This past April, NBC purchased Telemundo Communications Group Inc., owner of Spanish broadcast network Telemundo and cable channel mun2.
NBC Cable president David Zaslav confirmed that the company is looking to launch new digital Hispanic services, but declined to comment on whether his company has talked to Comcast about becoming an equity partner in such services.
"We are talking to Comcast [about carriage]," added Zaslav. "We're also talking to all of the major distributors because we're on the same side of the field on this one.
"We have invested significantly in Telemundo and mun2, and are investing in building some more services because we think there is a lot of potential to grow with the Hispanic marketplace in America and serve that constituency."
Bornstein on board?
To help implement its aggressive programming agenda, sources said Comcast is courting former ABC Television and ESPN president Steve Bornstein to man a soon-to-be created position within its programming division that would handle the MSO's network deals.
Bornstein, who resigned as president of the ABC Television Network last April — after less a year at the helm — is currently a consultant for the National Football League on television and strategic issues.
Sources said Bornstein has been in contact with Comcast as part of his role in advising the league whether to offer the league's NFL Sunday Ticket out-of-market service, which is currently exclusive to DirecTV Inc. — to cable operators.
Bornstein could not be reached for comment. Both Comcast and the NFL would not comment on the matter.
It's unclear how high Bornstein's position would sit within Comcast's programming hierarchy. Published reports have indicated he would be equal in stature to Comcast vice president of programming investments Amy Banse and E! Entertainment Television president and CEO Mindy Herman.
Given Bornstein's programming background, sources said, he could be an asset to Comcast should it look to negotiate new rate-card agreements with networks.
But others said Bornstein's history as a head of both networks and major divisions would preclude him from answering to anyone.
"I can't see Steve working under anyone in that situation," one observer noted.
Mike Farrell contributed to this report.