Ops Take New Look at Launch Fees

Author:
Publish date:
Updated on

Cash for carriage -- the practice of new programmers paying
upfront launch fees to get distribution -- was all the rage a few years ago. And while
deals of that kind are still being floated, and taken, cable operators are giving them a
more careful, skeptical look this go around.

"They [cash-upfront launch fees] are still out there,
but they're not as hyped as they were before," said Brad Greenwald, vice
president of sales and marketing at Time Warner Cable in Houston. "There is a clear
understanding on the operators' part now that they come with a price tag."

In 1996, Rupert Murdoch's Fox News Channel made
headlines when it offered cable operators, and even direct-broadcast satellite provider
DirecTv Inc., roughly $10 per subscriber to roll out the start-up 24-hour news network.

Discovery Communications Inc.'s Animal Planet, along
with Home & Garden Television and CBS Eye on People, were also offering upfront launch
fees, in the neighborhood of $5 to $8 per subscriber, according to operators.

Many of those deals -- some of which were especially
attractive because they had no strings attached to the money -- are off the table now. But
several new programming services, as part of their current distribution drives, are
offering upfront money for launch -- although it's often less per-subscriber than was
previously proffered, more in the $3- to $5-per-subscriber range.

Officials at Great American Country and Game Show Network
have said that they are in a launch-fee mode.

Some programmers, who didn't want to be identified,
maintained that cable operators aren't interested in upfront cash fees anymore. These
operators would rather get other launch incentives -- free carriage for a few years, for
example, or terrestrial exclusivity -- according to the network officials. But one MSO
executive said that was "wishful thinking" on the part of the programmers.

"There are still fees to be had," that MSO
programming official said. "There are $3-per-subscriber deals out there right
now."

Operators, and even DBS providers, said they are being much
more discriminating about which upfront launch fees they will take. There are a variety of
reasons for this caution, but part of it is based on their experiences with the first big
round of cash payouts.

NO FREE LUNCH

In some cases, operators learned that while the upfront
money looked good at first blush, the deals were capped by escalating license fees that
ultimately just didn't make financial sense. And operators also found out that not
all upfront cash fees are alike: Some were really just loans to cable systems, and not
outright gifts.

"Nobody was giving away free money way back down the
road," said Bob Wilson, vice president of programming at Cox Communications Inc.

In addition, one top network executive and a number of
operators said federal regulators are taking a look at upfront cash-launch fees, prompting
some MSOs to pass up opportunities to take the money now.

In other instances, the corporate headquarters of some MSOs
cracked down and mandated that their local systems amortize the upfront cash fees over
time, making them less attractive.

All three DBS providers -- facing limited bandwidth, just
like cable operators, and now the size of some large MSOs -- are talking to new
programmers about upfront launch fees. But they are being careful, too, about which offers
they take.

"There is no such thing as a free lunch," said
Denny Wilkinson, senior vice president of marketing and programming for PrimeStar Inc.
"If programmers are giving you something upfront, they're usually getting
something in the back end. I just want a fair price and a fair return when you pay me
upfront."

PERFORMANCE COUNTS

Jedd Palmer, MediaOne's senior vice president of
programming, said there are several reasons why upfront launch fees are somewhat less
prevalent and less in vogue than they were a few years back.

"A couple of networks that launched for a fee
haven't really performed," Palmer said, "so people are more concerned with
their long-term performance."

Also, it's too expensive for smaller networks to
launch with big upfront fees now, and giant programmers, such as Murdoch, have already
paid for distribution, according to Palmer.

"The guys with a large amount of money have done it
already," he said.

In fact, Wilkinson said he gets leery when a tiny start-up
network with little distribution offers substantial upfront launch fees.

"I wonder how long they'll be around and what
kind of a business plan they have, because it doesn't make sound financial sense for
them to be paying big fees," he said.

Cox did get upfront launch incentives to roll out HGTV,
which is virtually fully distributed across the MSO now, according to Wilson. But the
decision to carry the network was "programming-driven," he said.

"We liked the programming," Wilson said. "We
always start with the programming. If we like the programming, the launch incentive was a
cherry on top of that."

But in today's channel-locked environment, Wilson
said, the new networks offering upfront launch fees don't have that appeal in terms
of unique programming.

"A few [of the networks offering launch incentives]
that I know of now won't provide anything materially to differentiate us,"
Wilson said. "You ask: Does it add material value to your lineup?"

The fees can make for bad consumer press, too. Last year, a
TV critic responding to Multichannel News' annual TV-writers' survey
complained about Animal Planet, questioning whether such a channel was necessary. That
critic pointed out that operators had been paid to carry Animal Planet.

LOOKING FOR VALUE

Ron Martin, chief operating officer of Buford Television
Inc., recently launched two new networks. In one case, he said, he took upfront launch
fees. In the other, he opted for initial free carriage of the new network.

"When we have to make the decision between upfront
launch fees or free service, I'm looking at the value of the package over time,"
Martin said. "If I get a payment upfront, I can put the money somewhere and make
interest on it. You have to work the math and figure out the value of the use of the
money."

Whether or not to take a launch fee hinges on the specifics
of the offer, Martin and other operators said.

"There are different kinds of deals," Martin
said. "With some launches, where you get launch fees, it's like lending you
money. The deal requires significant distribution and a high license fee for many years.
We've tended to stay away from those deals."

Harron Communications Corp. is being more careful about
taking launch fees because ultimately, license fees for new networks add up, and consumers
are sensitive about having those costs passed on in their cable bills.

"We are looking much further down the road as to where
rates are going and if adding product for launch fees is the way to go," said Linda
Stuchell, Harron's vice president of programming. "All things being equal,
we're happy to take launch fees. But for most of these services, ultimately, there is
a license fee. If you add up three or four new services, and then have hikes on the old
ones, it adds up. And customers are very sensitive about rates."

Some cable systems were able to use upfront launch fees to
offset financial hits during given periods.

"The launch fees were great to help you through a
tough year," said one operator, who asked not to be identified. "We received
tons of it. It's great to have it, but you tend to rely on it. And now, our
accountants and auditors are looking more carefully at it."

JUST A LOAN

That operator noted that networks had varying deals for
their launch fees. In some cases, the upfront cash was essentially a loan that had to be
treated as a liability on the cable system's financial books, the operator said. This
meant that the system would have to pay back the launch money to the programmer if the
system was ever sold, for example, and that the new owners didn't have to continue
rolling out the network.

In contrast to that operator, Cable One has not treated its
upfront launch fees as a one-time windfall, according to Jerry McKenna, its vice president
of strategic marketing.

"We look at the net effect over the rate," he
said. "We smooth the launch fees and amortize them over the terms of the agreement,
rather than taking the fee one year and then having our costs escalate later."

CBS Cable offered operators $6 per subscriber to launch Eye
on People, but the deal was truly a loan, said Lloyd Werner, executive vice president of
sales and marketing for CBS Cable.

"Our offer was a bank," he said. "We would
give an operator up to $6 per subscriber. In exchange, the operator would pay us 10 cents
per month, per subscriber, for 72 months, on top of our license fee. So we got paid $7.20
over the term of the deal, when we only paid $6."

As it turns out, only "a few, a very small
minority" of operators took up Eye on People on its launch-fee offer, Werner said. He
estimated that only about 500,000 of its roughly 10 million subscribers were the result of
cash launch fees.

"It [the upfront launch fee] was an attempt to show
that we were willing to get behind Eye on People," Werner said. "And we still
get inquiries about it. There is no question that operators are still looking for money in
one form or the other -- cash upfront, co-op money, advertising support for a launch. They
are always looking for some kind of inducement. A&P, Safeway -- all of them do the
same thing: look for compensation for shelf space."

Lynne Buening, vice president of programming for Falcon
Cable TV Corp., said it's only fair that operators get compensated by programmers for
their valuable analog shelf space.

"For analog, it's [upfront launch money] still an
issue," Buening said. "It's prime real estate. It's Malibu.
There's a value to that."

COMPETITIVE EDGE

In some cases, the threat of competition from DBS has cable
operators looking less toward launch fees and more toward adding networks that will give
them a competitive edge, according to one new programmer.

"Competition rules over what you could offer anyone
[in launch fees]," the programmer said. "Operators are being more
discriminating. The primary thing is to match up well against your competitor."

Pam Burton, director of marketing at Prime Cable, has a
10-point system that she uses to assess whether or not to carry a new network. That plan
includes whether her customers want the network, whether it adds value, its license-fee
costs and its local ad-sales potential.

"First, you have to decide if you want to carry the
network, and then, the issue of launch fees is brought up during negotiations,"
Burton said.

Similarly, Marcus Cable Co. L.P. considers upfront cash
incentives as just one factor to look at in giving a network carriage.

"We have never chased after deals based solely on
launch fees," said Lou Borelli, executive vice president and chief operating officer
at Marcus. "But we do think that kind of compensation is an important component of a
deal."

During its negotiations, in addition to weighing potential
launch fees, Marcus typically looks for "long-term license-fee security,"
according to Borelli. "It's a balancing act," he said.

At least one MSO hasn't taken upfront launch fees in
the past, and it won't in the future: Charter Communications Inc.

"Charter has never done cash-for-carriage deals,"
said Patty McCaskill, its vice president of programming. "Our channel capacity is not
for sale to the highest bidder."

She added, "We are trying to look at ways to keep
rates low. We are interested in terrestrial exclusivity, and we want license-fee relief,
like free carriage, so that we can introduce new product and not charge our subscribers
higher fees."

Related