Operators, Networks Spot Hot Buttons


ESPN’s recent carriage deals marked what appeared to be somewhat of a truce between programmers and cable operators.

That peace might not prevail.

For this year and into the near future, distributors and content providers cited roughly a half-dozen looming challenges both sides face. Those issues — some quite familiar and some new — could either erupt into nasty disputes, or could ultimately lead to solutions and compromises that will help both parties.

The hot buttons named most often by programmers, MSOs and direct-broadcast satellite providers were: overall programming costs; skyrocketing sports costs; crafting workable business models for video-on-demand and HDTV; resolving issues relating to broadcasters; and upcoming renewals of USA Network’s carriage deals.


If there’s one issue that cable operators, DBS companies and even smaller programmers agree on, it’s that spiraling programming costs remain one of the industry’s biggest problems and have to be kept in check.

“As a smaller operator, rising programming costs are absolutely No. 1 on our hit parade,” said Patty McCaskill, senior vice president of programming for Cebridge Connections. “They have to be.”

Officials at DirecTV Inc. this year have also expressed their worries about the issue, quite publicly.

“Rising programming costs are one of the largest concerns we have in the business,” said Stephanie Campbell, DirecTV’s senior vice president of programming. “Because they are such a large part of our expense line, a huge amount of money, it gets a lot of focus in the company. … It’s such a huge number, it can make things swing one way pretty quickly.”

In light of the recent hearings in Washington, MSO officials said that more than ever, the pressure is on them to keep their rates down — and that’s made it near impossible to pass on programming increases to consumers.

That’s also a big component in the ongoing tension between operators and networks — and one that’s led to public flare-ups.

There are a group of MSOs who are straining to hold program-price increases at the consumer price index, like Comcast Corp.

“Certainly, Comcast is going to try to stabilize programming-cost increases at a CPI level, which is only fair and reasonable,” said executive vice president of programming Matt Bond.

It’s a similar situation for Cable One Inc., which is trying to keep its rate increases at a maximum of 5%, even as programmers increase prices by double digits.

“We, in fact, did not take a rate increase last year,” Cable One vice president of strategic marketing Jerry McKenna said. “So we are struggling to get as close as we can to the quote-unquote CPI figure. However, with your cost infrastructure increasing at those rates, it’s extremely difficult.”

While many cable operators said they’d like to keep program-cost increases at CPI levels, some conceded that it’s too simplistic to take a cookie-cutter approach to programming rate hikes.

“You have to look at it on a case-by-case basis,” said Insight Communications Co. CEO Michael Willner. “Just as cable rates go up in excess of the CPI — why, because our costs go up in excess of the CPI, and we’re doing what we can to try to contain that — why should I expect a network to be subject to CPI when their costs may be legitimately going up in excess of that?”

Since its merger with AT&T Broadband, Comcast has actually used its increased size to secure greater volume discounts from networks.

“In many cases, we’ve had reductions in programming costs,” Bond said. “So I think CPI is certainly a goal, but there are exceptions to the rule both up and down, certainly, based on relative value.”

Cable operators are devising their own measuring sticks to determine which kinds of price increases to give a programmer.

“The best way to evaluate the value of a network on a cable system is by viewership,” Willner said. “If a service’s ratings go up and its contract comes up, I think it’s perfectly appropriate to reward them for a successful experience.”

On the other hand, “it’s inappropriate to pay huge increases for networks that are not performing well,” according to Willner.


Cable operators caution that the new deals ESPN did with nearly a half-dozen MSOs earlier this year aren’t a panacea for the ills in the sports-programming arena. For one, a number of big distributors, such as Comcast and DirecTV, still haven’t done new ESPN deals. Secondly, regional sports networks are still looking for hefty price increases during renewals.

“This is an ongoing problem,” Willner said. “This hasn’t gone away because Cox signed a deal with ESPN. There are other sports programming networks who will still come around.”

Operators are particularly concerned about rising prices for regional sports channels, which are among the priciest networks.

Fox Cable Networks Group has many long-term agreements in place for its regional sports channels, but it also has some deals that are set to expire, according to executive vice president of affiliate sales and marketing Lindsay Gardner.

“We have a number of regional sports deals that are coming up,” he said. “We will have spirited negotiations about price, as we always do. But in 99% of the cases, we agree and we find solutions. We’ll find solutions for this next round over the next two, three years.”

The newest wrinkle on the sports-programming front — and one that’s already led to bitter discord — are moves by professional teams to launch their own regional sports channels.

“The caution I have regarding sports fees is that we are hearing more and more from teams like the Minnesota Twins, the Houston Astros, who want to go out and build their own sports network like YES [the New York Yankees’ Yankees Entertainment & Sports Network],” McKenna said.

“And they want to charge what Fox Sports [Net] was charging for multiple professional sports. So all of a sudden, if you were paying Fox Sports $1.50 and one of these new sports networks built around baseball or hockey are going to try charge the same or more.

“They see it as a windfall that can help them be competitive within their league, because it will give them a lot more revenue to hire new players, or whatever. I see that as another potential wave of sports-programming increases.”

McCaskill also expressed concern about sports franchises starting their own regional networks to compete with Fox.

“What we see happening with Victory [Sports] in Minnesota is just the beginning of what we’re going to see,” she said. “Then you’ve got the [National Football League] that wants its own network. The [National Basketball Association] that wants its own network. Major League Baseball. And all of them are not inexpensive networks.”

Victory Sports was an attempt at a club-owned regional sports channel in Minnesota, which almost totally struck out in doing cable carriage deals, even though it had rights to Minnesota Twins Major League Baseball contests. Victory was reportedly seeking $2 to $2.20 per subscriber — a price balked at by Time Warner Cable, Charter Communications Inc., other MSOs and satellite providers. The rights to Twins games ultimately reverted to Fox Sports Net North in May.

Some carriage deals for regional sports channels provide for license-fee reductions if a network loses rights to carry a particular sport, like baseball, for example.

“But it never goes down as much as the new provider wants to charge,” one operator said. “We don’t have bandwidth to carry it all and the cost is an incremental $1 to $2 on top of what we been paying.”


New businesses such as VOD and HDTV could turn out to be the Holy Grail in terms of generating new revenue for programmers and operators alike, if all the players can find — and agree to — the right financial model.

While many MSOs are gung ho about VOD, programmers are more tentative. The implications of those businesses have to be carefully thought out, programmers said.

Networks are worried that VOD will cannibalize the core linear-channel business, and are generally seeking incremental compensation for content offered over these new platforms.

These are no small bones of contention, and MSOs are aware of the programmers’ concerns.

“Our next priority is figuring out the VOD-business model for basic-network content that works both for us and the networks, which allows them to discover new growth vehicles while at the same time helping us create new product that is attractive to customers and allows us to grow, too,” said Cox senior vice president of programming Bob Wilson.

VOD, HDTV and broadband provide an opportunity “to really grow the business, rather than just go through rate increases,” according to Wilson, a sentiment shared by other MSO officials.

Willner, for example, sees VOD as a platform for some sports, so that only consumers who want that programming have to pay for it.

Comcast’s position has been that it doesn’t want to shell out incremental fees for VOD content from programmers.

But at the National Show in May, Comcast Cable Communications Inc. president Steve Burke said his MSO is willing to pay programmers for unique original content, like a local dating or employment service, created specifically for the VOD platform.

Insight made the decision to deal with program suppliers on an individual basis regarding VOD and HDTV, according to Willner.

“If it’s content we want to carry and programmers want to charge for it, we will make an economic evaluation of the worthiness of content and if we have to pay, we will charge,” Willner said. “It seems to me that most programmers come to the conclusion at some point that they are more interested in a wider universe of subscribers being given access to their programming that a smaller universe.”


But programmers like ESPN and Disney Channel, among others, have made it clear that they want to be paid for VOD content.

Sean Bratches, ESPN’s executive vice president of affiliate sales and marketing, said that even though certain “factions” are looking for free content for VOD and HDTV, those offerings all involve an investment from content providers.

“As to the right valuation for these new platforms, that give and take, particularly with the maturation of the traditional video side of the business, is going to be hard-fought territory,” Bratches said.

Disney Channel now has a subscription VOD service, Disney Channel OnDemand, according to Ben Pyne, senior vice president of affiliate sales and marketing for the ABC Cable Networks Group.

“We have a very strong opinion on SVOD, or on the VOD space, and we believe there’s a way for both operator and programmer to make money in the space,” Pyne said.

“We feel strongly there is value there, and on this issue we have stuck to our guns. Comcast has a different point of view, and we have certainly made our position clear.

“In my opinion they could potentially be, just like the Internet, they could be leaving money on the table. Because now it’s [VOD] free, whenever they try to monetize it, I think it’s going to make it that much more difficult.”

Fox Cable has supported cable-operator VOD initiatives — particularly with SVOD — “giving more unfettered access to our prize jewels than any other content company,” according to Gardner.

“We need to work with distributors to monetize this content on VOD,” he said. “That’s an important series of discussions, because VOD is progressing out of infancy into a material business. This year and next year, we’ve got to plunge into deep conversations with distributors about what the model is and we mutually benefit from it.”


Distributors and broadcasters have already skirmished over several new types of issues that have only surfaced in recent months. In the past, cable operators have had many of their disputes with TV stations owned by media conglomerates. But this go-around, there may be more problems with independent station groups.

Broadcasters such as Emmis Broadcasting Corp., among others, have publicly been sounding off, saying they want cash from cable operators in exchange for retransmission consent for their stations. In fact, Emmis has also sought cash in exchange for allowing cable systems to carry its stations’ HDTV signals. A fracas over that issue broke out with Cox Communications Inc. earlier this year, right before CBS was set to air the Super Bowl.

In terms of broadcasters seeking cash for carriage for retransmission consent, Mike Pandzik, president of the National Cable Television Cooperative, said, “That’s a terrible problem. It’s almost extortion … The guy with the rabbit ears gets their signal for free, but the guy with cable would be paying for it.”

And compensating TV stations for their HDTV signals “is a big deal, because it’s uncharted territory,” according to Pandzik.

Cable One doesn’t think cash for carriage is an issue, because it simply will not ante up and pay TV stations, according to McKenna. “That puts it into sort of a different framework,” he said.

In some instances, Cable One has been prepared to drop a station rather than offer cash for carriage, because “once that door is cracked open, there’s just no end to it. If it’s 'X’ number of cents per subs during this retrans period, it’s going to be double that next retrans period,” McKenna said.

As a result, Cable One tries to work with the stations.

“We can provide them value by promoting the news on cross-channel, we can extend their reach so that the have a broader audience to advertise to,” McKenna said. “So there are a number of things we are doing for them, and usually you can sit down and work most of those things out.”

An official with another MSO, whose also been able to hold the line and not pay stations for retransmission consent, said, “It’s going to become more challenging in the future, with broadcasters feeling that they have a need to recoup costs for digital transition.”


Operators also face a new kind of threat from broadcasters. Both Emmis and U.S. Digital Television Inc. are planning to use digital spectrum from TV stations to offer wireless cable service to consumers. USDTV’s service, with such networks as ESPN and Disney Channel on its program lineup, is already up and running in several markets.

Officials at several MSOs, including Cox, have questioned how broadcasters will explain away using their spectrum in this manner to federal lawmakers.

“How are they going to justify to the [Federal Communication Commission] and Congress that they’ve been given this spectrum for free and then they’re either — in the case of USDTV, they’re selling that spectrum to a third party and gaining profit off of it or in Emmis’s case, doing this same kind of thing, taking that digital spectrum to make it into a competitive offering,” one operator said.

“It’s going to be interesting to see how Washington looks at that, of taking a free land grab and trying to monetize it rather than doing what they said they wanted to do, which was put out digital high-definition signals and more local programming of value to the local communities,” the operator said. “If they’re using that spectrum just to rebroadcast CNN, I don’t think that’s what Congress has in mind.”


In the next year or so, a number of USA’s carriage deals will be expiring. But this go-around in renewal talks, USA is part of a media conglomerate that not only has a stable of cable networks that includes not only CNBC, MSNBC, Bravo, ShopNBC, Telemundo and Mun2, but also the NBC TV stations — and their retransmission-consent leverage.

USA’s fellow programmers seem to be divided about how the general-entertainment network will fare during its negotiations, and what kind of rate increases it may be able to extract from operators.

In the past, NBC Cable has been masterful in the way it’s used its assets — retransmission consent and the Olympic Games — to win double-digit rate increases for CNBC and MSNBC. And it apparently plans to do the same with USA and Sci Fi Channel after closing its acquisition of Vivendi Universal Entertainment, and USA and Sci Fi, is closed.

Back in December, the Federal Trade Commission issued a second request for information regarding the NBC-Vivendi Universal Entertainment merger, after looking at internal NBC documents in which the Peacock Network said its combined cable unit could raise fees to operators.

USA has one nice bargaining chip this year: It can argue to operators that it deserves a license-fee increase because its ratings are way up. In the first quarter, USA was No. 1 in the primetime ratings for the first time in four years, tied with Turner Network Television. And compared to other networks, USA’s monthly license fee is relatively modest, in the 35 to 40-cent range.

NBC Cable has also said that it will air some Olympic programming on USA this summer, which it could conceivable cite as a reason to raise rates.

Nonetheless, some cable-network officials believe USA is in for tough negotiations.

“USA is a vulnerable channel,” one such executive said. “I don’t anybody is going to drop USA, but I think NBC is going to have to give stuff up. NBC is going to have to use some of its jewels, it’s going to have to pony something up in order to safeguard USA.”

A number of USA’s deals reportedly expire around the same time, and will make talks at the negotiating table harder for the network, according to one source. “That’s problematic,” the source said. “You have to stagger these deals, otherwise the leverage shifts.”

NBC Cable did complex, long-term deals with most MSOs in 2000 that included renewals of CNBC and MSNBC, retransmission consent for NBC-owned stations, and Olympic coverage.

But several sources believe that retransmission consent in the Olympics deals was probably only for a three-year cycle, and not for the full term of the contracts (many of which extend until 2008). That means NBC Universal could still have retransmission consent as a weapon in its arsenal to drive license-fee increases for USA, as well as Olympic programming.