While TV distributors have recently spoken loudest about rising programming costs, last week at the Goldman Sachs Communacopia conference in New York, it was the programmers’ turn to beef.
Complaints over out-of-control programming costs have been a constant topic of conversation during high-profile events like the recent Time Warner Cable/CBS blackout (resolved after one month on Sept. 2), recent proposed retransmission-consent reform legislation from U.S. Rep. Anna Eshoo (D.-Calif.), the ongoing Satellite Television Extension and Localism Act (STELA) reauthorization and the February la carte proposal from U.S. Sen. John McCain (R-Ariz.), RBC Capital Markets media analyst David Bank said.
“The heat has been turned up over the past few months,” Bank said. “These [programmers] are trying to get their views heard in the court of public opinion, for sure.”
IGER: LOOK BEYOND VIDEO
The Walt Disney Co. chairman and CEO Bob Iger set the tone almost immediately, telling the New York investor audience last Tuesday that distributors have built great businesses on the back of high-quality programming and might have to get used to reaping lower profit margins on their video product.
Online apps such as Watch ESPN have driven demand for highly profitable broadband services, and related sales of telephone lines, Iger said.
“You can’t look at the [multichannel video-programming distributor] of today and only focus on their video business,” Iger said. “You have to look at the collection. While the cost of programming has increased, and perhaps that has resulted in some lower margins for the distributor, the fact is, they have put themselves in these other businesses that have inspired great growth over the years. They may have to accept lower margins on their video business because they are in a business that goes well beyond that.”
While cable, telco and satellite-TV distributors have called for regulatory reform and more flexibile programming packages to alleviate pricing pressure for consumers — including selling channels a la carte — Viacom CEO Philippe Dauman said that drastic move would lead to higher prices.
“The system as it exists allows a lot of choice for a reasonable price,” Dauman said later on Sept. 24. “The price to pick networks that you think you want now would go up in an a la carte world. People are fundamentally rational once you talk to them. I expect that everything that will unfold will be done in the commercial marketplace, not regulated by Washington.”
Time Warner Inc. chairman and CEO Jeff Bewkes was more blunt, saying in his Sept. 25 session that programming, at an average cost of $3 per, day is still less than what most people spend at Starbucks.
“It’s $3 a day,” he said. “You don’t think that’s a deal?” Bewkes also took distributors complaining about the high cost of programming to task. “If you look at their earnings, you know that they have a healthy business,” he said.
Distributors at the conference weren’t silent about programming costs, but they also wanted to comment on the other hot topic of recent days: industry consolidation. Their comments, though, seemed to depend on which side of the table they were on.
Arthur Minson, chief financial officer at Time Warner Cable — which has rejected overtures from Charter Communications and Liberty Media — said added scale “may help” reduce programming costs in some instances, but was quick to add that TWC had no desire to add to its already considerable heft.
DirecTV chairman and CEO Mike White, whose company might welcome acquiring satellite-TV rival Dish Network, said other industries have consolidated to correct any imbalances between suppliers and distributors. The current regulatory environment seems to be against large combinations, he added.
Time Warner Cable has been the target of most of the merger speculation in the industry since June, when Liberty Media, which owns a 27% stake in Charter Communications, proposed combining those two MSOs. While TWC reportedly rebuffed those offers, it has still been the subject of much speculation, including possible mergers with Cox Communications and Cablevision Systems.
Minson avoided specifics, but restated TWC’s position that it would look at every potential acquisition through the lens of whether a deal provides more shareholder value than buying back the company’s own stock.
Another top priority for Time Warner Cable is to maintain its current debt ratio of 3.25 times forward-looking cash flow and its investment-grade credit rating, the CFO said.
White cited recent big consolidation plays that were struck down by regulators over anti-competitive concerns: AT&T’s failed 2011 merger with T-Mobile and the proposed combination of American Airlines and US Airways. He said some of the same regulatory mentality — an aversion to reducing the number of competitors in a sector — exists in the media business.
“There is no question that it is a very challenging regulatory environment for any deal to get done,” White said. “The challenge would be, can you educate regulators that there are other considerations?”
DIRECTV SEES COST PRESSURE
White said when an imbalance exists between “upstairs supply and downstairs distribution, usually the way that gets solved is you have consolidation of some sort.” Otherwise, it is almost inevitable that consumers’ prices will rise in concert with the cost of that supply.
“The fundamental concerns of most antitrust law is to ensure that consumes are getting a fair deal,” White said, adding that if programming costs are ignored, “consumers’ bills are going to continue to rise faster than their income. I personally believe that some consolidation would be pro-consumer and pro-competition. But you have to take a holistic look at it and whether that would happen with this Justice Department, I couldn’t say.”
White was more certain that DirecTV would have to increase its rates again in 2014 — it hiked charges about 4.5% in 2013 — largely because of programming costs.
“Realistically, prices will have to go up again because content costs are going go to up again,” White said, adding that increases in 2014 will likely be lower.
At an investor conference, content providers cited the value they bring in making the case for current programming costs.