Fee Increase Threatens Digital-PPV Launches

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Sports networks aren't the only services looking for
hefty rate increases: Viewer's Choice, squeezed by studios for a greater share of
digital pay-per-view movie revenues, is asking operators to ante up a 5 percent rate
increase for 24 of its 36 digital-PPV channels.

The increase, which took effect last month, threatens to
slow the launch of digital-PPV channels as operators attempt to find the most profitable
products to help recoup expensive digital-technology upgrades.

Viewer's Choice, in a letter to its affiliates two
weeks ago, asked operators to pay 60 percent of each PPV-movie purchase back to the PPV
service for its channels 9 through 36.

Viewer's Choice channels 1 through 8 will maintain the
traditional split, with 45 percent each going to the studios and the operators, while 10
percent is funneled to Viewer's Choice.

The reason? Hollywood studios -- seeking to maximize
revenue opportunities in a potentially lucrative near-video-on-demand and, eventually, VOD
world -- are pressing for 50 percent of all PPV-movie revenue from cable.

With costs for theatrical movies skyrocketing and the
home-video business slumping, studios are seeking a greater revenue slice of the PPV-movie
pie, which, in its current analog setup, has been very disappointing.

In turn, Viewer's Choice, which services the PPV needs
for the majority of addressable households, will pass the increase on to operators,
sources close to the situation said.

Faced with its own increasing costs involved with uplinking
and maintaining 36 digital-PPV channels, Viewer's Choice can ill afford to absorb a 5
percent cut in licensing fees, according to sources at the network.

Jim Heyworth, outgoing president of Viewer's Choice,
would not reveal specific numbers, but he did say that the new terms are "more
favorable" than what operators could have been faced with.

Sources said Request Television -- which folded in July --
was pitching a 60 percent split for all of its services before it went out of business.

"Our mission is to grow the category to the greatest
extent possible," Heyworth said. "We're pleased that we made the terms more
favorable than they were before."

But the increase was not good news for some operators.
Already beset with the high cost of rolling out digital technology -- and faced with the
uncertainty of how NVOD will perform -- some operators were reconsidering their plans for
major PPV-channel deployments after Viewer's Choice's rate increase.

"We're not going to pay 60 percent, ever,"
one infuriated operator said. "It's a disincentive to launch PPV services, and
we're going to examine each market to see whether it's worth rolling out
[NVOD]."

"What [the studios] are asking for is equivalent to
killing the goose that laid the golden egg," one top 10 operator said. "The
studios are putting up a financial barrier to cable operators investing in channel
capacity for VOD and NVOD. We are testing NVOD in a couple of systems and, based on the
performance, we'll decide whether to focus on other things."

But one top 10 operator said the increase was anticipated,
adding that the potential increase in buys should offset the rate increases.
"I'm confident that the volume [of buys] will increase so substantially that
we'll be able to withstand the increase," the operator said.

An incentive for operators could be the creation of a new
PPV window for digital channels -- if operators ante up an upfront guarantee. Traditional
PPV windows usually fall 30 days to 40 days after home video, but recently, those windows
have averaged close to 45 days, as the home-video industry continues to put pressure on
studios to extend PPV-debut dates.

Studio sources, however, have hinted at an early digital
window that could fall to at least 30 days, and that could go even earlier, depending on
the amount of the guarantees.

But at least one studio executive said Hollywood
doesn't need to provide incentives or justify its rate increases. He added that other
distribution technologies, such as direct-broadcast satellite, are already providing 50
percent splits.

"We believe that PPV should be a 50-50 business, and
we have other domestic deals where we get 50 percent of the revenues, so why should cable
have a different ride?" the executive asked.

Another studio executive admitted that operators would
initially be upset about the rate increase, but they would come around once they realized
the potential of multichannel PPV and NVOD services.

Operators also need to launch additional PPV channels to
compete effectively with DirecTv Inc., which is generating 10 times the buy-rates that
cable pulls.

"PPV is a business, if you have enough channels,"
the studio executive said. "I don't think that it would be a wise decision to
concede the PPV business to DirecTv by not aggressively rolling out digital PPV."

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