MTVN Charts Course Amid Op Cost 'Squeeze'

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MTV Networks chairman Tom Freston has labored in the cable industry a long time, so it's worth noting that he thinks programmer-distributor relations are at an all-time low.

"I've been in this job now for 15 years, and I think they're tenser than they've ever been," Freston said. "It's like the tube is being squeezed."

Like cable operators, he blames sports networks — and their spiraling license fees — for taking a lot of money from the market, thus putting pressure on other programmers.

That is the difficult landscape that MTVN faces at the National Show in New Orleans this week, as it talks with MSOs about a variety of issues.

MTVN will aggressively pitch operators on MTV2, now in 40.8 million homes, and on its four new diginets, a group that includes Nicktoons TV.

The programmer has been seeking license-fee increases for some of its offerings, such as TNN: The National Network, and is working with sister company Showtime Networks Inc. to develop a gay premium service.

And, of course, MTVN is continuing to try to goose distribution for TNN and CMT: Country Music Television, the other network it inherited after parent Viacom Inc.'s merger with CBS Corp. two years ago.

"Both these networks will be big growth areas for us," said Freston. "That was the biggest thing in the merger for us, the businesses we got."

Apart from TNN and CMT, the merger gave MTVN some new negotiating chips it could use to drive carriage of its cable networks.

In a complicated series of transactions that occurred two months after the Viacom-CBS marriage closed in 2000, MTVN was ultimately able to trade CBS's stake in Washington, D.C.-area regional sports service Home Team Sports — which really didn't fit into MTVN's cable portfolio — to Comcast Corp. In exchange, MTVN secured significant rollouts for CMT, TNN and TV Land from the cable operator.

"It was a creative deal structure," one network affiliate-sales chief said.

Also thanks to the merger, MTVN also can use retransmission-consent for CBS-owned television stations as a playing card in contract talks with cable operators, in those cases when the broadcaster's retransmission-consent agreements lapse at the same time as MTVN's affiliation contracts.

"We've been able to strike deals that affiliates, and us, and CBS are all happy with," Freston said. "You haven't seen CBS dropped anywhere … There's not a lot more to say.

"It's [retransmission consent] going to continue to be — just like with ABC and NBC — something that is on the table in a negotiation."

But the programmer is tight-lipped about exactly what's happened so far. Since the Viacom-CBS merger closed, MTVN secured the Comcast pact and signed a major carriage agreement with Cablevision Systems Corp. But it won't discuss whether retransmission consent was involved in those deals.

A source familiar with the situation said the Comcast deal didn't include retransmission consent. Cablevision officials couldn't be reached for comment.

During a speech two years ago — just weeks after the Viacom-CBS merger closed — Viacom president and chief operating officer Mel Karmazin said Viacom would use retransmission consent for CBS TV stations to drive carriage for MTVN services, specifically MTV2 and Noggin.

CBS'S LATE START

CBS's historic track record in cable had been rocky from the get-go. In 1992, the broadcaster demanded — but failed to obtain — cash in exchange for retransmission consent for its owned TV stations.

When CBS debuted the cable network CBS Eye on People, it did get some operators to launch it by tying carriage six-year retransmission-consent deals that spanned 1996 to 2002, sources said.

Discovery Communications Inc. bought Eye on People, and later folded the channel. The status of the retransmission deals that were tied to the defunct network — pacts that would have expired at the end of this year — is unclear.

Matt Polka, president of the American Cable Association, a group representing small and midsized independent cable operators, has lobbied against retransmission consent and its use by media conglomerates to force MSOs to carry new cable networks.

He expressed concern about Viacom, which potentially can use not just the CBS TV stations, but also its UPN outlets, for retransmission consent.

"CBS/Viacom has a lot of assets to use, and will use, to exploit carriage," Polka said.

Without offering any details on retransmission consent, Karmazin characterized Viacom's current relationships with MSOs as good. CBS hasn't had any wars with MSOs so far, he noted.

"We've not had any battles," he said. "I'm sure if you made enough phone calls, you might find someone who thinks we're scum.

"But I think we've had terrific relationships. We signed our first deal for digital retransmission consent when I was at CBS [in 1998], with Time Warner Cable."

Along with ad agencies, cable operators have been added to the list of important clients to which Karmazin makes calls.

In April, for example, Karmazin was in Philadelphia to meet with Comcast Corp. president Brian Roberts and Comcast Cable Communications Inc. president Steve Burke. They discussed Comcast's pending merger with AT&T Broadband and its timetable, and then "talked about everything that is going on," Karmazin said.

In addition to MTVN's prior deal with Comcast, the programmer also inked a new long-term carriage pact with Cablevision. It included launches of several new MTVN diginets, as well as increased distribution for TV Land and MTV2.

TNN HITS TOP 10

MTVN is especially bullish on TNN, one of the few fully distributed analog networks to have completed a major repositioning from its prior incarnation as The Nashville Network.

Once a regional service with a country-music spin — and a median age of 55 in primetime — MTVN has reprogrammed TNN as a "young-adult entertainment network." Its median age has dropped to 36, and it's now a Top 10 network in primetime.

Since the merger, TNN's distribution has grown by about 8.5 million subscribers, to reach 85.2 million. Distribution of CMT — which has also undergone a makeover that added more long-form programming to its lineup — has jumped by roughly 20 million, to 59 million homes, according to Freston.

MTVN has invested roughly $1 billion on TNN's programming, adding series from World Wrestling Federation Entertainment Inc., Star Trek: The Next Generation, Baywatch
and off-network episodes of the CBS hit CSI: Crime Scene Investigation
. The channel has been dubbed "The New TNN."

WANTS PRICE HIKES

MTVN, citing the improvements to TNN and CMT, announced its intention to seek license-fee increases for both. In some cases, MTVN has tried to bundle the two channels.

Under that scenario, if a cable operator only carries TNN and doesn't pick up CMT, TNN's license fee would jump substantially. According to Paul Kagan Associates Inc., TNN's monthly, per-subscriber license fee now averages 19 cents.

MTVN's overall license-fee revenue has increased. During a conference call on first-quarter earnings, Viacom chief financial officer Richard Bressler said "subscription revenues [at the company's cable networks] were up double digits, due to both price and volume."

For the year, UBS Warburg analyst Chris Dixon has estimated that affiliate fees for Viacom's cable networks will increase 8 percent to 9 percent.

MTVN argues that the improvements to TNN and CMT warrant higher license fees.

"We think that we give great value for our services, despite the increased competition that's out there, in the number of channels," Freston said. "Our networks perform really strong. They're good brands. They're valuable for cable.

"TNN and CMT saw some rate increases on an absolute-dollar basis — not that much, but operators are going to get their value for that. TNN is going to be another brand that cable operators are very proud to carry — unique, just like MTV and Nickelodeon — and the same with CMT."

That reasoning doesn't fly with all operators.

National Cable Television Cooperative senior vice president of programming Frank Hughes groused that distributors are being hit up for license-fee increases from a army of programmers.

"Everybody wants 10 to 15 percent increases," Hughes said. "I don't know where it's going to end."

If MTVN felt compelled to invest $1 billion on programming for TNN, according to Hughes, "let them finance it from their advertising, not our license fees."

While MTVN touts TNN's higher ratings, Hughes said that increased viewership doesn't help his co-op members, who are small and medium-sized cable operators.

But higher ratings do enable MTVN to charge more for national ads on TNN, Hughes said.

Hughes also "cringes" when MTVN seeks rate hikes because he said its networks are among the most profitable in the industry. He noted that according to Paul Kagan Associates Inc., MTV: Music Television's cash-flow margin is nearly 56 percent of revenue, surpassed by only a couple of networks, such as CNBC and Discovery Channel.

Freston acknowledged that it's a tough environment in which to try to secure rate increases from distributors, and he blamed soaring program costs on sports.

FRESTON: WE'RE 'MODERATE'

"There's less license-fee increase money to go around than there was before," he said. "We try to adjust our business for that and be a responsible moderate, and program our business accordingly.

"The bulk of the increase in our performance has come from what we've done in ad sales and some of our other businesses like movies and so forth."

Skyrocketing sports-programming costs have strained relations between MSOs and distributors, according to Freston. But he claims that MTVN, "along with a lot of other cable networks," has only sought "moderate" increases.

As sports rights-fees rise, they are passed along to cable operators in the form of higher license fees, according to Freston.

"That eats up a lot of money," he said. "And cable operators have a lot of pressure not to raise their consumer rates. So the tension exists between all programmers, but I would say, is aggravated by the sports programmers. It's the YESes [Yankees Entertainment & Sports], it's the ESPNs and the sports networks that are in this pinch.

"I sympathize with the cable operators' position. It's got to be very tough, particularly when you've got 60 people nibbling at you."

Freston predicted that "something's got to break" in terms of spiraling sports-program costs.

"It's so out of whack," he said.

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