Key Oxygen Carriage Deal Caught in AOL Spotlight

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There was bad news at Oxygen Media last week, as it laid off most of its Web site staff and its carriage deal with Time Warner Cable came under scrutiny.

Oxygen, conceived as a marriage of a women's cable television network and the Internet, is letting go 29 of the 44 employees at Oxygen.com. And at a time when barter deals involving Time Warner Cable parent AOL Time Warner and its online unit have come under the microscope, Oxygen's affiliation pact with the MSO is getting the once-over.

That carriage deal — which reportedly involved Oxygen buying about $100 million in ads, mostly on the AOL unit — is one of the transactions that's being eyed as part of an internal investigation by AOL Time Warner.

The Time Warner deal, signed last year, was crucial for Oxygen because it provided cable carriage in the top media market, New York City.

Industry sources last week said Oxygen's deal with Time Warner Cable was not unique, in that buying ad time, either locally on cable systems or nationally on cable networks, is sometimes a component of carriage deals.

For example, sources said that WE: Women's Entertainment, which also inked an affiliation agreement with Time Warner Cable last year, bought ad time on several Turner networks — the MSO's corporate siblings — as part of that deal.

As to Oxygen's own online woes, CEO Geraldine Laybourne informed her staff about the layoffs last Tuesday. In a memo, Laybourne said Oxygen's online operations were being scaled back and that its core Web site will be used to promote the cable programming service, not to offer original content anymore.

Explaining the cutbacks, Laybourne wrote, "It's no secret the nature of the interactive industry has changed dramatically over the past 18 months ? for now, we need to focus on the television component of our business and take a less aggressive stand in the interactive space."

Oxygen, about to debut new fall programming that includes a primetime show from Oxygen co-founder Oprah Winfrey, will also continue to operate Oprah.com, according to Laybourne.

The day before her memo went out to staff, The Wall Street Journal
published a story that said AOL Time Warner Inc.'s internal investigators were scrutinizing deals done by the AOL unit, including one involving Oxygen. According to the report, Oxygen purchased $100 million worth of advertising last year, most of it on the AOL unit, as part of an agreement to secure carriage on Time Warner Cable. AOL Time Warner also reportedly invested $30 million to $50 million for equity in Oxygen.

Such deals have become a sensitive issue, now that investigators at the Securities and Exchange Commission and the Justice Department are probing the barter-ad arrangements America Online had with its partners and customers.

AOL Time Warner has acknowledged in an SEC filing that it may have "inappropriately recognized as advertising and commerce revenue" $49 million from three different transactions. Oxygen was not one of those three. But federal authorities are investigating whether or not the value of the ad revenue in past barter deals was accurately reflected by the AOL unit, or if it was inflated.

From Oxygen's perspective, the network maintains that it received good value, and promotion, from its pact with AOL Time Warner and Time Warner Cable.

"It was a three-pronged, multi-faceted deal, every component of which was very important to our company," Oxygen spokeswoman Kassie Canter said.

Did 'WE' Do It?

Rival women's network WE announced a carriage deal with Time Warner Cable a month after Oxygen unveiled its pact with the MSO last year. Sources said that WE bought ad time on two AOL Time Warner-owned networks — TBS Superstation and Turner Network Television — as part of that cable affiliation agreement, and viewers soon saw spots for WE running on those services.

"Both WE and Oxygen were going to Fred [Dressler, Time Warner Cable executive vice president of programming] trying to get distribution and he played them off of each other," one source said. "And he bid it up and he ended up doing deals with both of them."

WE declined to comment last week on the carriage deal, and Dressler could not be reached for comment.

A Turner spokesman confirmed that WE ran a flight of ads on Turner cable networks last year, but had no details on the ad buy's cost or its duration.

According to several cable-network executives, it's fairly typical for carriage agreements to have components beyond just license fees. Deals could involve retransmission consent, a network paying an upfront cash launch fee per subscriber, or even a programmer making ad buys on companies owned by the distributor involved, especially in this era of vertical integration.

As one top programming executive said, very few carriage deals are "pure" — just involving an MSO paying license fees to carry a cable network.

If a network is willing to pay upfront cash launch fees to get carried, spending some of that money on ads instead is an option some programmers — and distributors — opt for.

"There are a number of networks out there that are offering a certain amount of money per subscriber," one cable-network official said. "Some have flexibility and can say to the cable operator, 'You're a good advertising vehicle anyway ? We can either write you a check for the full amount, for $10 a subscriber, or we can buy some advertising from you so we get something out of it.' You usually don't get the lowest ad rates, but at least you get some media value."

He added, "The other thing to remember is, especially with the consolidation, these big companies are the best media vehicles."

The benefit to the distributor in such carriage deals is that they can book the ad money as revenue for that quarter, rather than having to amortize it.

"But there is a lot of scrutiny now about what is and is not appropriate," the network official said.

Another programming executive added that making an ad buy on a distributor, or one of that distributor's companies, as part of a carriage deal is also a way to get around contractual most-favored nation clauses, which bar one cable operator from getting a cheaper license-fee rate than another.

For example, a major MSO with a lot of subscribers might balk at paying a cable network's going rate, say 15 cents a month, per subscriber. So the network may charge that MSO the 15 cents, but buy enough ads on the MSO or one of its sister companies to offset part of that 15-cent license fee.

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