Nets Fear Squeeze Play From Jumbo-Sized Ops

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As MSO consolidation continues, cable networks are bracing
to get hammered by growing cable operators using their new-found leverage to angle for
lower programming costs.

As they acquire more subscribers, buyer MSOs will now be
entitled to bigger volume discounts on license fees from programmers.

Giant MSOs such as AT&T Broadband & Internet
Services (formerly Tele-Communications Inc.) and Time Warner Cable have long enjoyed
double-digit reductions in their rates based on their size.

"Those programmers giving out volume discounts are
going to feel it," said Curtis Symonds, executive vice president of affiliate sales
and marketing for Black Entertainment Television.

MTV Networks and ESPN are among programmers that have long
given MSOs breaks on their rates based on a sliding scale, predicated on the number of
subscribers an operator gives a network -- the greater the distribution, the lower the
license fee.

And now, a number of acquiring MSOs -- such as Adelphia
Communications Corp., Cox Communications Inc., MediaOne Group Inc., AT&T Broadband,
Classic Cable and Charter Communications -- are significantly boosting their subscriber
totals.

"Any programmer that offers volume discounts has to be
concerned," said Frank Hughes, senior vice president of programming for the National
Cable Television Cooperative. "They're going to feel the pinch."

While volume discounts are an issue, they represent just
one impact MSO consolidation will have on programmers, which have grown accustomed to
asking for rate hikes as their program costs have climbed over the years.

Now, cable-network executives said they expect MSOs to be
especially tough during contract renewals, looking for flat or even lower license fees in
exchange for continued carriage on their newly expanded distribution base.

"The next round of negotiations, MSOs are carrying a
pretty heavy stick against a programmer," Symonds said. "It does give them some
clout."

Facing the prospect of paying out more volume discounts, as
well as tougher deals with MSOs, several cable-network executives, who wanted to remain
anonymous, said they feared that they won't be able to meet their revenue numbers.

"It's all pretty bad on the revenue side,"
one official said. "It's going to hurt. It has a big impact."

In contrast, some programmers, including MTVN president
Mark Rosenthal and Comedy Central senior vice president of affiliate relations Brad
Samuels, said they don't see MSO consolidation as gloom and doom.

These bigger MSOs are looking to invest in and upgrade
their infrastructure and to deploy digital set-tops quickly, which will create more analog
and digital slots for cable networks, according to both executives. "That has to be
generally good for us programmers," Rosenthal said.

But on the downside, a few affiliate-sales officials said
privately that the MSO mergers -- which often result in fewer cable systems as markets and
regions are clustered -- mean they will need less staff, which could prompt layoffs.

"You don't need as many people to run around and
call on systems," one network affiliate-sales chief said. "The number of players
is being reduced at all levels ... Ultimately, you do need fewer people. It's very
distressing."

While Disney Channel claims that it hasn't laid anyone
off in its affiliate-sales department, it is already redeploying its staff in response to
some of the MSO consolidation, according to Charlie Nooney, the network's senior vice
president of sales and affiliate marketing.

Disney just closed its Dallas affiliate office, which had
seven staffers, he said.

With a number of East Coast MSOs, such as Comcast Corp. and
Time Warner, getting larger, Nooney said, he is transferring additional affiliate
salespeople to Disney's New York office to service those customers. For example,
Disney just moved an affiliate-sales official who worked in Burbank, Calif., to its New
York office.

"[Comcast and Time Warner are] growing and becoming
bigger accounts," Nooney said. "It's a question of where you best put your
resources."

The seven Disney Dallas staffers have been offered jobs in
other offices, according to Nooney.

While MSOs in some cases are merging so they can expand
their telephony efforts, others are making acquisitions in part to benefit from economies
of scale as they grow larger.

"Obviously, that's one of the reasons why
consolidation works for MSOs in all areas, including programming costs," Nooney said.

Programmers typically won't discuss details of their
affiliation contracts and volume discounts. But some insight into those deals was revealed
last year in a lawsuit, since settled, that the NCTC filed against MTVN.

In that suit, the NCTC noted that large MSOs such as
then-TCI and Time Warner "are frequently able to obtain deep volume discounts off of
wholesale programming prices in the range of 40 percent to 60 percent or more."

That lawsuit included a copy of an MTVN rate card from June
1997, which laid out its volume discounts. An MSO offering an MTVN network to 250,000 to
749,999 subscribers got a 5 percent volume discount; one with 750,000 to 2,499,999
subscribers got a 10 percent break; one with 2.5 million to 4,999,999 homes got a 15
percent discount; and those with 5 million or more subscribers got 25 percent off.

And now there are MSOs, such as Charter and Adelphia, that
will be at or approaching 5 million homes as a result of acquisitions, and that would then
appear to qualify for the top end of MTVN's volume discount.

However, Rosenthal said, "Rate cards for us going
forward are not what they were in 1997."

He added that license-fee discounts are not only based on
number of subscribers, but on penetration levels and how many MTVN services an MSO is
carrying -- a win-win for both sides.

"It's not always bigger is cheaper," he said

ESPN downplayed the impact of consolidation last week,
denying that it would be hurt by having to shell out more volume discounts.

Sean Bratches, ESPN's senior vice president of
affiliate sales and marketing, conceded that his network does offer some volume discounts.

But he said ESPN's "performance discounts"
-- in which operators get price breaks for giving ESPN and its spinoffs favorable channel
positions and adjacencies -- are more important and prevalent. Bratches said those
discounts won't be affected by MSO consolidation.

Andy Heller, executive vice president of Turner Network
Sales, said MSO consolidation has been ongoing, and he didn't think it would have a
have a big impact on programmers.

"Most of the guys who have gotten bigger have always
had a lot of leverage," Heller said. "It may change the leverage, but not
dramatically. Content is still king. If you come out with a strong product, they're
going to want to carry it."

And consolidation or not, there are certain realities that
won't change, several programmers said.

MSOs would be hard-pressed to drop ESPN in any battle over
license fees, they said. And no matter how big they get, operators will never be able to
wrangle the kind of volume discounts that TCI negotiated over the years.

Symonds and others believe that smaller and midsized
networks may pay the price in upcoming negotiations with larger MSOs, since they lack the
leverage of an ESPN in terms of license fees.

"For whatever's left [in money from operators],
there's going to be a battle," he added.

Describing the new landscape for programmers, Bill Goodwyn,
senior vice president of affiliate sales and marketing for Discovery Networks U.S., said
that several years ago, there was TCI, Time Warner and the four "Cs" -- Cox,
Comcast, Continental Cablevision Inc. (now MediaOne) and Cablevision Systems Corp.

"Previously, if you didn't get one of the four
Cs, you still had a pretty good business," Goodwyn said. "But that's
changing. The stakes have gone up. That means fewer MSOs have more that they can give, and
[programmers] have more at risk."

Symonds is of the same mind as Goodwyn about the greater
power MSOs now wield.

"Years ago, if someone said they didn't want to
do business, you could go across the street [to another operator]," Symonds said.
"But you can't do that anymore, because across the street is going to be the
same."

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