Programmings Haves and Have Nots

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The new millenium has been marked by some testy standoffs between MSOs and programmers, with News Corp. pulling the Fox broadcast network's signal
off Cox Communications Inc.
systems early in the year,
and ABC-owned TV stations
getting dropped from Time Warner Cable.
Multichannel News
assembled cable-network executives from companies that have retransmission-consent clout or MSO partners-as well as stand-alone independents-to discuss the current state of affairs between cable operators and programmers. The group included Jeff She
ll, president and CEO of the
Fox Cable Networks Group; Johnathan Rodgers, president of Discovery Networks U.S.; Decker Anstrom, president and CEO of The Weather Channel
and ex-president of the National Cable Television Association;
and Robert Townsend, president and chief operating officer
of the
start-up African-American service New Urban Entertainment
Television. Their freewheeling discussion-under questioning from editor in chief
Marianne Paskowski and programming editor Linda Moss-covered topics ranging from The Walt Disney Co.'s hardball strategy with Time Warner, spiraling sports costs, the
current distribution landscape, video streaming, the risky
economics of diginets and the difficulty of launching new
networks. An edited transcript follows:


MCN: What do you see as the state of programmer-operator relations these days, in light of what's
happened this year with Disney and Time Warner and in light of, frankly, what happened earlier in the year, Jeff, between Fox and Cox? Is it worse, better or the same as five years ago?


Shell:

First of all, our dispute with Cox was probably a different level than Disney's dispute with Time Warner and Comcast [Corp.]. It really didn't get in the press very much. It wasn't really that personal. And we have a great relationship with Cox. It was a dispute, a business dispute that was settled. We're both happy with the way it was settled.

And speaking for us, our relationships are probably as good as they've ever been with the cable industry right now, which for us is saying a lot, given all the rumors about DirecTV [Inc.] and all that kind of stuff. The people in the cable industry right now, from my respect, are very smart people.

And we're looking at a landscape that's changing so much, and it's becoming so much more complicated, that the relationships have to be strong and they have to be long-lasting, or else we're not going to be able to take advantage of it. So I actually think it's pretty strong, despite the retrans flare-ups.


Rodgers:

I'm sort of old school on this. I long for the days in which the relationship between the programmer and operator was based on the fact that they loved your programming, that when you sat down to talk to them, it wasn't a conversation involving either leverage on one hand, or retransmission on the other hand. It was, in fact, the value of your programming service. And I miss that. And for us at Discovery, we don't have leverage or retransmission, so we believe we're still selling on merit. I know a lot of salesmanship goes into what we're doing. But I really miss those days.

But the fact is, we still get in the office, they still return our phone calls and once there, [Discovery Networks U.S. executive vice president of sales and marketing] Bill Goodwyn and his staff represent the value of taking one of Discovery's programming services. The relationship between Discovery and the operators is as good as it's ever been. It's just that there are a lot of things orbiting around both of us in our conversations.


Anstrom:

I'd like to pick up from what Jeff and Johnathan said, and I think they were both polite. But I've been at this for over a decade now. Again, I had a very different hat the last year. I'd never seen relationships between operators and programmers be as bad as they are now. Again, as a company, we're fortunate in terms of having good relationships. But there is a very poisonous, negative atmosphere out there.

And broadcast companies-Fox excepted, I give them credit for the approach they've generally taken-are the principal culprits in this. And it washes over every other programmer no matter how good the relations we have or Discovery may have. It infects the relationship every day.

There's a hostility and a suspicion that is very dangerous for the future of our business, because we're entering a period of time in which we really need to renew the partnerships between operators and programmers if we're really going to fulfill the potential of digital cable, if we're really going to fulfill the potential of broadband.

The analog model was really a genius model in which there was the win-win for the content providers and the distributors, and there was a particular win for the consumers. And if we're operating in an environment in which lobbyists from a broadcast company are going to city council of a community-


MCN: You want to name names? You're talking
primarily about Disney.

Anstrom:

NBC has been no different.


MCN: ABC has been by far the most bellicose.

Anstrom:
Disney's playing a Russian roulette game in which, if they're not careful, they are going to shoot themselves in the head. The cylinder will click and there's going to be a bullet in it sometime when they pull the trigger. And, frankly, that might be helpful if that happens right now.

Because this is absurd, in terms of the environment that's going on now.

Again, it infects every dialogue that every content company has with every distributor. And that's the reality of it.


Townsend:

It's a common question though. It's access. Who decides who gets access? Who should have access and why? That's the bottom line. Disney is saying they want access for their products-all their products-and NBC has been saying the same thing. Discovery is saying that. We're saying that. And space is at a premium. It still is.


Anstrom:

But the risk of the game that's being played now is that we're going to alienate-and that to me is the lesson of the Disney-Time Warner dispute-the people whom we depend upon, which are consumers. They don't care. And if consumers turn on all this and decide that they want to exercise other options as we play these games out in community after community, then we're all in trouble. And that's the risk. Obviously, it's a very competitive marketplace.

Somehow, we need to get some equilibrium in terms of how far are we really ready to pursue our own specific business interests and rupture the basic models that, again, have worked pretty well for people for over 20 years.


MCN: You know, speaking of the deviation from a
basic model-
Multichannel News
broke a story about one month ago about Adelphia Communications Corp. asking 10 cable networks to give up their analog space for several months while it completes its rebuild. And presumably, there'd be some horse-trading: 'If you do this for us, maybe
we'll launch your other networks. 'Are you worried about other MSOs pursuing a plan like that?


Shell:

Maybe I'm naïve about that, but ultimately, when all the horse trading is done, when all the leverage is done, it comes down to what the consumers want. And if an MSO takes a couple of networks off analog and puts them on digital and the consumer says, 'I don't want to pay X amount for those networks, I'd rather have a wide basic package, 'they have an option now. They can go buy a DirecTV dish, or they can go buy an EchoStar [Communications Corp.] dish.

And-speaking as the broadcaster at the table, putting that hat on-retransmission consent is a complicated thing that's happening right now, where if the broadcasting network still had 80 percent market share of the viewing audience, it wouldn't be an issue.

But now because they're getting less and less viewing audience and cable's getting more and more, they're finding it harder and harder to exist on the single revenue-stream model.

And then you see the consumer saying, 'Don't take
Millionaire

away from us. 'So there's a dynamic going on there where retransmission consent is ultimately a flawed model, and it's going to have to be addressed at some point by somebody, because it doesn't work.


MCN: That sounds odd coming from a broadcaster.

Shell:
Yeah. [Group laughs.]


MCN: And I've got you on tape, too.


Shell:

I know. But the flip side of this is-God forbid, and I'm from the cable business, so don't crucify me too much-if ABC was allowed to charge cable operators for the ABC network, they'd probably be getting more than ESPN, significantly more than ESPN is getting per sub right now.


Rodgers:

But what consumers lose out in this battle is, in fact, they don't get a choice when retransmission or leverage is used to say 'and you will take our next four channels, whatever they may be. 'Not only is the consumer not getting a vote, the operator doesn't get a vote. And that's just really wrong for our system.


MCN: One of the reasons that we picked the people on this panel is we've got two 'haves, 'Johnathan and Jeff, and two 'have-nots, 'Decker and Bob, in terms of programmers who have
either MSO ownership or retransmission consent, and those who are essentially independents. Speaking for the independents, do you resent these guys?


Shell:

Before they answer this, can I just disagree with something Johnathan just said? I would argue that Johnathan and Decker have incredible leverage. That's because Discovery may not walk in, Bill Goodwyn may not walk in, with retrans in his bag of tricks, but what he walks in with is an incredibly popular, incredibly well-programmed channel, that if that left your cable system, you would have all hell breaking loose, probably as much as if ABC left your cable system.

And same thing with The Weather Channel, which has become an icon in our society. You have to have The Weather Channel. If that suddenly disappeared from a cable system.and that's leverage. It's just different forms of leverage.

So I'm not sure of the distinction between 'haves' and 'have-nots' is as simple as MSO ownership or retransmission consent. Ultimately, somewhere it gets down to the popularity of your service.


Townsend:

It's pre-emptive, too, with The Weather Channel. They got there first, and so they occupy the high ground. And they've got that leverage. I want to use currency to get carriage. Everybody uses currency of some kind.


MCN: What is your
currency?


Townsend:

An underserved market. The urban marketplace is grossly underserved. Cable hasn't delivered on that promise to serve all its communities.


MCN: Why do you think that is? Why is your market underserved? And you, and MBC [Major Broadcasting Corp. network], did a deal with AT&T a year ago.


Townsend:

About a year ago. The problem is access. In this case, the opportunity to be part of a digital package has presented itself, but now we've got to go through the process of getting in the digital packages. And, the AT&T systems are a patchwork of packaging. And so, how do we get through that process? There are different stages of upgrade and different stages of boxes going in all of that-it's almost a natural barrier to us at this point in time.

And we also have a Time Warner deal. Same kind of scenario, where the digital boxes are going in. So that's our problem.


MCN: You might have another problem if Black Entertainment Television becomes part of MTV
Networks. Viacom Inc. brings all of its muscle to BET via cost, promotion, clout, etc. Are you worried about Viacom's acquisition of BET?


Townsend:

We're in a competitive environment where we need to be concerned about all channels across the spectrum and the kinds of programming that they present.

It's like a supermarket shelf. Everybody wants their products upon that shelf.

But I also see a real benefit to it. It validates the worth to the marketplace. If Bob Johnson gets $3 billion for BET, I'm jumping up and down. [Group laughter.] He's going to take my valuation up.


MCN: I'm going to go back to Jeff. I don't want
you to think that I'm picking on you. The fact that the Disney-Time Warner situation was so contentious-and there was so much bad press about the signal getting pulled-has that effectively removed pulling the signal from your arsenal, or any broadcaster's arsenal? You were under the gun with Cox, but you did pull the signal. Could you do that today?


Shell:

We'll see. It's going to be interesting to see what happens with the Comcast-Disney dispute. Fortunately for us, as Decker pointed out, we've done all our retransmission consent deals for awhile. We're done. And we did it generally in a pretty non-contentious, friendly, constructive way.


MCN: With one big exception.


Shell:

Well, with one big exception that was resolved, ultimately. And I think we both regret the way it went. And probably if we had it over to do, we'd do it in a better way. To go back to what Bob was saying, it is about access, but every industry is about access.


MCN: Well, again to this Disney-Time Warner thing. Disney is using that situation to try to get access to America Online Inc., to
interactive platforms, even with Comcast. Do you be grudge them that? Is
Disney overplaying its hand?


Rodgers:

We certainly will ask. We want everything that broadcast-owned programming services get. But we have to ask and negotiate to get it. And we don't always get it.


Anstrom

: Bob's right, and your question's right, and everybody uses whatever leverage they have in the marketplace. Where I would draw the line-and again, some of this is my own experience, in terms of the scars of the early and mid-90s that the industry still has-is at all of our self interest.

Once we start reaching into communities and touching consumers with these disputes, we start touching politicians with these disputes, and we set in play a range of forces that nobody knows how it comes out.

This industry went through it once and everybody got hurt. In fact, the people that got hurt the most were programming companies. This whole programming industry came to an absolute standstill for 18 months after the 1992 Cable Act passed.

Disney's been irresponsible in terms of, for example, going to Washington and invoking, in the middle of the AOL-Time Warner merger, the notion of, 'Let's have the government come in and regulate interactive television. 'We don't even know what interactive television is today. We're still developing a model. Nobody has a revenue model for interactive television. The platforms aren't even falling in place. And we want to invite the government to come in and regulate it before it's even off the ground?

That's the kind of line I guess I wish we'd be a little more careful about as an industry. Because you put forces in motion and none of us can control them. And you can almost be sure that it'll boomerang in a way that none of us will like to see.


MCN: That's what I mean, is Disney overreaching? Jeff, when you people were in there talking with Cox, were they asking for access to interactive platforms? Did that even cross your mind?


Shell:

We didn't take that approach, but that doesn't mean it's not a valid approach. I go back to, maybe people don't share my opinion here, but I do think the one thing Disney does have is that they have a valuable programming service at ABC. They're investing billions of dollars and they have a right to get value for that service, to fight for the retransmission consent for that service.

Now the question is, are they overreaching? I don't know. There is probably a little bit of blame on both sides, as there was with our Cox dispute.

Disney may be being a little bit too aggressive. Specifically, I agree with Decker, about the way that they're handling it in such a public fashion. I'm not sure they won't look back on that and say they have some regrets about that.

But the flip side of it is there still is somewhat of a gatekeeper mentality in the cable business. And this business is changing, becoming competitive. And if you don't give consumers what they want, they have alternatives.


Anstrom:

There's been a relationship, from the programmer's side, with operators over time which all of us would love to have. It goes back to some of your earlier questions: more opportunities for in-depth discussions about what are consumers really interested in, how can we jointly work together to meet consumer interest? What new programming ideas, what unserved markets are there out there?

That dialogue doesn't happen much. I'm not quite sure why it doesn't happen much.


MCN: Well, you're selling-under government mandate-your programming
to direct-broadcast satellite
, to telephone companies. MSOs still resent that, and they say, 'We built your networks. 'They say they miss the partnership
.


Anstrom:

But see, maybe part of this is certainly getting beyond the analog world and looking to digital and interactive and other markets where we have a chance to sort of restart this again.


Townsend:

But the question is, will they take advantage of it [and] based upon what criteria?


Anstrom:

Right.


Townsend
:
So they're starting out by saying, 'We have invested all this money in technology that's hanging from poles or in the ground or set-top boxes. I can't afford to give you a carriage fee, Right? So you have to give it to me free for 10 years, or give me $10 a sub, in order to do it. 'And, as a new service, we can't do that because we're going to acquire good content or produce good content to serve the communities or the target groups we're going after.

They won't have those discussions about that. They might pay lip service to it, but when it comes down to negotiating the terms of the contract, it's 'How many years do I get free? 'It's not, 'Can you produce content, package content for the long haul, so that I'm providing a quality service going forward? 'We never had those discussions.


Anstrom:

Well, that's why you're saying it should be a two-way street.


Townsend:

I'm willing to talk to them about that, but they're not.


MCN: Don't you guys get frustrated, again, as independents?


Townsend:

Yeah, but it's reality. And so you find ways to deal with that. You find other kinds of currencies that you can use. You build upon your past relationships. You forge new relationships, strategic alliances, partnerships-some sort of way.


MCN: Because it is such a tough landscape out there, what's your pitch to operators?


Townsend:

Well, we start out by identifying the marketplace-$490 billion that African Americans spent in 1999. Right? That's like the 11th-largest economy in the world. Right? There's only one company really serving that as a destination place.

Two, advertising. The top 200 advertisers spent $7.5 billion on cable advertising in 1999. The top 25 spent $2.5 billion. These same advertisers spent $1.5 billion just in black media in 1999. So that portion of the marketplace is underserved as well.


MCN: But then why has it been such a hard road to hoe?

Townsend:
Resources. Financing. It's like any new business. The reason a lot of new businesses fail is because they're not well-financed. So we've got to be well-financed.


MCN: It seems operators are much more interested in other products, like high-speed Internet access, Internet-protocol telephony and digital cable.


Anstrom:

In terms of particularly looking at the opportunities in digital cable, really what we need is a renewal again to the commitment to a dual-revenue stream model for digital cable, in terms of a recognition by the operators that none of us can create quality product for digital cable just based on advertising.

We're in a terrible chicken-and-egg problem at that point, because we'll never have enough penetration to get enough advertising dollars to invest in quality programming. We'll never get off first base. So there has to be a recommitment to the dual-revenue stream model.

What that means, though, for the incumbent networks is that we need to rethink our approach to pricing now in analog. Because the cable operators are right, the days of just sort of jacking up the license fee for analog and say, 'Pass it through or reduce your margin, 'that's not an acceptable alternative to the cable operators. And a win-win here for us is to restrain analog license-fee increases in a way that the operators can protect their margins.


MCN: Maybe you should just take a cut, Decker.

Anstrom:
We haven't been asked to cut our license fee, yet, but every discussion, well every discussion we have is about restraining license fees. And look, the wild card out there is sports.


MCN: Jeff? [Laughs.]

Anstrom:
For Johnathan and Bob and me, every time sports fees go up 20 percent, just to pick a number, there's less money for Discovery Kids, and there's less money for Weatherscan Local. So that's the reality of it.


Rodgers:

The advantage of being a privately held company, the fact is, the money we get from our analog channels we do reinvest. And all that reinvestment goes, in fact, to digital. And we're among the leaders out there in the community of helping the operator sell their digital boxes. So their advantage is to our advantage. Decker knows the economics of digital. They are not there.

But I spend millions of dollars a year on each of these digital channels. We're now starting to do original programming on digital channels. It costs a lot of money, but a good portion of my money goes to the marketing team that's out there in the fields every weekend, pushing digital boxes. So, the answer is no, we're not prepared to take a cut in our analog fees.


Anstrom:

But you're not seeking a 20 percent increase in your analog fees, that's my point.


Shell:

I've got to disagree. I guess where I'll come out is this is not socialism, it's capitalism. And it would be nice to have everybody have an equal share of the pie, but that's not the world that we live in. And reality is, if you look throughout the world and look at the percentage of programming fees for other platforms that are paid to sports versus the U.S., you'd find a much greater percentage on [British Sky Broadcasting plc] in the U.K. and on [Star TV] in Asia that are paid to sports services.

And the reality is, in my opinion, many of the license fees paid to certain networks are somewhat arbitrary. And if you actually had a consumer split up their cable bill into how they would allocate each channel, I think you'd actually find that.


Anstrom:

Discovery and The Weather Channel always come out at the top. [Group laughter.]


Shell:

Because that's what I said before. The Weather Channel would get more, Discovery would get more, sports would get more, and services that are more of a commodity, not to name any, probably get less. And that is the world we are going into in a competitive environment.

We're going to continue, unfortunately, to raise rates until they're what the market will bear, and that's what the market forces are.

Many of these digital models that are out there are not businesses and some are. And ultimately the market will determine which are. But to say that we should charge less than the market will bear for one of our services that we've invested a tremendous amount of money in, so that others who don't actually have an economic business can have an economic business, that's something that I would object to.


Anstrom:

What about this? What about a partnership between a programming company and an operator in which there's an understanding they will restrain prices on analog, which is pretty mature product at this point. And we'll build together a new digital. In other words, we'll take less than the market might give us on analog, but that the reciprocal agreement is that we'll get a decent subscriber fee to build a digital business?


Shell:

Just to defend our company here for a second, we have sacrificed some of the increases in our regional sports networks that we would have probably gotten, and entered into long-term deals with Time Warner and AT&T [Broadband] and some of the others, in exchange for working with them on some of our other services.

Now a cynical person would say that's using leverage to launch services people don't want, but the flip side of that is it's enabling the cable operators to have a little bit more economic margin to be able to get the digital boxes out and to make the digital model work. It's an economic decision we made, pure and simple. It's an economic decision, frankly, that they made, pure and simple.


Townsend:

And in the long run I would assume that actually, you expect to get a higher rate.


Shell:

Absolutely. It's an economic decision.


Townsend:

Right.


Shell:

And it's in all of our best interests to see digital cable roll out successfully and quickly. And we're willing to take some hits, obviously, on our base business to do that..But ultimately it's an economic decision for everybody involved. It's a business.


MCN: Is there ever going to be an end to spiraling sports costs?


Shell:

You're seeing that right now in New York. The Yankees wanted to charge a rate for their rights that Cablevision [Systems Corp.] felt that at the end of the day, the consumers would object to if they were to pass that through. And you're starting to-you will see at some point-a mark where the market will bear, where consumers will simply say, or through the operators will say, 'This is too high of a rate.'

If you look at the other models, we're not there yet. But certainly the Yankees thing with Cablevision may be the first one that we're looking at here in New York. Maybe not. But we'll find out. But let's say the market will win.


MCN: But you don't see it at that point, except for New York right now.


Shell:

It depends. Some operators are starting to chafe at the amount they're paying to ESPN, 20 percent increases every year. You'll get to a point where.some operators will say, 'At this price, this product's no longer worth it to me. And I can launch 30 other networks that are going to give me more consumer base than this one network will give me with the sports fans.'


MCN: Is tiering an option for your sports networks, because the consumer does decide if they want to pay for it? I've heard [AT&T Broadband executive vice president of programming] Matt Bond say that's the answer.


Shell:

And I disagree with Matt. Tiering is not the answer. If you look at the fact that our revenue streams right now are a mixture pretty even between advertising and affiliate, with our advertising revenue growing a lot faster than our affiliate revenue is growing. If you begin to go back to the model

towards pay or back towards tiering, you're going to actually have to charge a lot more and you're going to be providing less choice to the consumer.


MCN: But Decker and Bob and Johnathan might think it could be the answer. And maybe you would have to raise your prices, but it would be to an audience that would want them, and will pay for
them. You would lose money, that's what you're saying?

Shell:
No, it's not just us losing money. The wonderful thing about analog cable, as Decker pointed out before, is it's a win-win proposition where you're able to leverage the costs and the interests of all the different special-interest groups across the whole base so that everybody wins from an economic basis.

The minute you tier sports, you'd better start thinking about tiering news. You'd better start thinking about tiering documentary. And you'd better start thinking about tiering weather. Why should sports be any different?


MCN: Do you agree Decker?


Anstrom:

I've never thought that tiering is a good idea.


MCN: Only on sports?

Anstrom:
No, in terms of basic cable. Tiering is a very dangerous strategy, because there's real value in the sports networks if you compare what you pay for basic cable that has several sports choices against taking a family of four to a Redskins game, which now costs almost $400. So, you compare that to the value of basic cable.

Cable is a great value for middle-or lower-income families in this country. And you'd tamper with that model with some risk. In the end, I have a whole different view of than Jeff's, about sports. I'm not sure the market is capable of resolving it. And frankly, the sports networks are sort of hostages.


MCN: To the teams and the owners?

Anstrom:
Look, this is a structure of the combination of undisciplined unionism and government-granted, quasi-monopolies, operating in a way that at some point, the politicians are going to have to fix the sports business.


MCN: So you're inviting the government in to fix baseball?

Anstrom:
I'd say baseball had better fix it, though,

because if baseball doesn't fix it at some point, the fans will fix it. But I come back to your tiering question. That's a very dangerous path to go down because there has been real value for consumers there and that's the reason I worry about the continued pressure on wholesale pricing on analog.

I don't think we can both push wholesale prices on the analog tiers as hard as we want to, and expect that the operators are going to work with us collaboratively on digital. You'd have to have your head examined if you were an operator to do that. And it's part of the tension that we're feeling in the relationship right now.


Rodgers:

I take a different view of this, and in fact, I favor tiering sports.


MCN: Alright!


Rodgers:

Just take the most recent deal with Major League Baseball. Baseball has declining interest in this country, yet Fox [Broadcasting Co.] paid in the billions of dollars. Now is Fox going to then turn around with their Fox Sports Network, which will air a lot of this baseball, and increase the rates of the operators? And the operators will feel that their hands are tied back, and that they will have to pay. People aren't watching it. But even worse than that, you're paying if you're not even interested in sports.


Anstrom:

I worry because you go down that path and Jeff's right, which is, some percentage of cable customers don't watch The Weather Channel-a very small percentage, actually [group laughter] or Discovery. That's a dangerous door to open.


Rodgers:

I do understand that it's dangerous, but I'll also take it one other step, that is as it relates to weather or as it relates to news or documentaries or even entertainment programs. All the money from the consumer, the operators, the networks, is not going to some entity. In this case it's going to the owners and maybe even the players. That's what's outrageous to me. I pay $75 a month for my cable bill in Washington, D.C. That's truly unfair.


MCN: Sports tier?


Townsend:

I'm a believer in tiering.


MCN: OK.

Townsend:
The cable industry developed its basic approach because its technology was essentially poor. So they had to package all of this stuff up in a basic package.

Now, as a new service-where I have a marketplace that I can identify as robust-tiering works for me, because I can go in and say, 'Here's the way to increase your penetration. Here's the way to get new boxes in. 'Eventually, though, I want to get melted down, and be on the broadest base. But as a market-entry strategy, tiering works for me.


MCN: You mean digital tiering?

Townsend:
Digital tiering.


MCN: But you want to be on analog?


Townsend:

Yeah, I want to be on analog, but I can't sell that case right now across a broad base.


MCN: In light of how difficult it is to launch new services, which you're experiencing, Bob.


Townsend:

Yeah, it's the hardest thing I've ever done in my life. It's a hard thing.


MCN: How do you think MSO consolidations have affected you as programmers? At Fox Family Channel, general manager Tracy Lawrence recently told us that it's a lot less of a relationship business now than it used to be.


Townsend:

When the industry was much more fragmented, it was easier to get a foothold, a beachhead, OK? And so the question is, beachhead. But before you can get on the battlefield, take the island, you've got to get on the beach.

And with consolidation, where there are seven cable companies and two DBS players, it makes it that much more difficult to get a beachhead. And our strategy was to get the beachhead, and we knew we had to do AT&T and we had to do Time Warner. And that was always our strategy.


MCN: Was it easier to get a foothold with the small
operators, in that there was more of a chance of them being willing to take a risk?


Townsend:

Right. The decision maker, and the

decision-making, was closer to my marketplace than it is now. Now, it's, 'What's the economics of the deal? How will my deal with Fox play against my deal with Viacom? 'It's not Fox's content and Viacom's content.

So consolidation is good and bad. It's good from the sense [that] I have fewer players in the game that I have to go and convince, but the conversations are tougher.


Rodgers:

Well, it certainly has allowed us to focus more on those six individuals.


MCN: That run the business?


Rodgers:

Yes. On the one hand, it really has made it easier. But I'll tell you what I miss. One of the things I love about cable is the fact that the operator is so involved in what we do. Whether it'd be the call from the guy in Montana or the call from the guy in South Dakota who said, 'Well, I was watching your channel and the program sort of didn't live up to what you promised,' or whatever else. Those were welcome.

It's so big now, so corporate, we don't get those calls. We can keep ourselves honest, but I like the fact that they also used to keep us honest and keep us living up to our promises.


MCN: You think there's less of that now?


Rodgers:

There's much less of that. And it's missed.


MCN: I hear you get very little opportunity when you get your two or three hours with [Time Warner Cable executive vice president of programming] Fred Dressler. That's basically your only time to go in and sell your
stuff, be cause you don't have that day-to-day kind of
talking, joking relationship.


Shell:

I don't think that's true.


MCN: No?

Shell:
It's hard for me to say, because I haven't been around the business as long as my colleagues. But I find, because the programming side is consolidated, too, to a certain extent, you get a lot of time because they're focusing on the same smaller amount of people as we are.


Anstrom:

Everywhere I go-Bill Goodwyn's been there for three full days before [group laughter].


Shell:

That's so true. I do agree with Tracy's comment, that while you don't have the individual operator involvement anymore, the other negative side or positive side is that it is much more of a game, with lots of different stuff going on. Maybe that's just because of Fox and the other businesses that we deal with have brought each of these guys, but it's constantly 12 different things on the table as opposed to just coming in with a channel and saying, 'Here's the channel, here's the programming services. It's great, you should carry it.'


MCN: It's much more complicated.

Shell:
Yeah.


MCN: And those contracts are getting bigger and bigger. Johnathan and Multichannel News
are
going to be on a Western Show panel to talk about streaming media. This kind of language is suddenly entering into programming contracts. What exactly is the nature of those clauses?


Shell:

Operators are right to fear that stuff they're paying for is getting streamed free on the Internet or wireless. It's up to us to we have to work with them to find ways to leverage the new technology and to do revenue streams and new businesses versus trying to create ways that are going to actually cannibalize their businesses.


MCN: Decker, do you have any contracts along with those clauses?

Anstrom:
Certainly, every discussion we're involved in. First of all, the issue of streaming video from the network onto the Internet, is certainly a discussion. And typically, the discussion starts pretty easily in terms of an understanding. Most networks that we're asking for license fees to be paid, the notion that we're going to turn around and make it available free to another distribution platform doesn't make sense for either us or the operator. So that's the easy part.

And obviously, there are other discussions that go to [television commerce] and other provisions that go beyond the video streaming. And there are certainly some efforts to apply the QVC home-shopping network models, of sharing t-commerce, if it ever emerges.


MCN: Johnathan, what's Discovery's position on video streaming?


Rodgers:

We do enter into these contracts and into these operations as partners. It is only fair that both parties consider what the future is.

We're prepared to do video streaming, but there has to be a business. And it's not here yet.


MCN: But operators don't want you to do that, do they? It's the whole issue of, 'Why should we be paying a license fee to have your programming on a Web site?'


Rodgers:

One of the things we look at is how we would work together to do video streaming. How would we work through their Web sites and their digital set-top boxes, as well as work with other parties?


Anstrom:

I haven't found a case where an operator was saying, 'We don't want you to do video streaming. 'If one really thinks that video streaming, in particular, is much more relevant in a broadband world, frankly, than it is in narrowband world. The same operators, obviously, are heavily invested in Excite@Home [Corp.] and Charter Online and Road Runner and all the rest.

So I don't think it's question of not wanting the programmers to develop content applications that will fuel the growth of broadband, because clearly the operators have a big stake in that.

At the first level, it's as simple as saying we're not going to put our network feed, unedited, just out on the Internet for free. And again, we wouldn't want to do that.


Shell:

The point is that new technology brings opportunities for everybody. We haven't seen anybody treating it as a threat yet. If it's treated as a threat, then you're not going to come up with the right answer. But if it's treated like an opportunity, where our partners and us can make additional revenue streams by offering something to consumers that they want, then there's an opportunity for everybody-the consumers, the operators, programmers.


MCN: Is making an acquisition now the best way to expand
your stable? Is it starting up a network? Partnering with an existing company?


Anstrom:

We're launching a new digital service and we're having great success with it. To pick up Bob's point, it's hard.

Weatherscan Local is a 24-hour local weather service that we're rolling out in markets all over the country in the next six months. And we've worked hard in terms of negotiation with the cable operators around the same issues we've been talking about. We're working hard to create a value proposition that's particularly attuned to the operators interested in the very local. But it takes a lot of shoe leather and a lot of patience. But we're getting there.


MCN: In terms of growing networks, Jeff, what's up with WebMD TV?


Shell:

Actually, we kind of sold The Health Network to WebMD in exchange for a stake in their company. And, like Discovery, we're committed to this genre. It's another underserved genre on cable. There is probably room for two or more, depending on how it's programmed. Right now, WebMD has had a change in management and they're kind of evaluating their corporate strategy, so we're still on track, but it's somewhat dependent on what they want to do, given that they're the owner of the network.


MCN: Johnathan, room for two health networks? You've got one.

Rogers:
There is. I have such admiration for how good the people at Fox are at programming channels, I was sort of glad when they sort of sold it off to get an interest in the overall company. [Group laughter.]

They're just great competitors. And I'll never forget, when we announced ours, they announced theirs and they had all these green apples, it was driving us crazy. [Group laughter.]

But the fact is, we're sort of glad that they're not as actively involved in this as they were. But yes, there is room for two.


MCN: Are you finding that carriage decisions are still being made out in the field once a corporate deal is in place? Does the local system have any say-so in determining what gets on a system, or is it really preordained at the corporate level?


Rodgers:

Both are true. Clearly, after the deal is done at the corporate level, you have to sell it into the system. You're back to walking, to selling, to knocking on doors.


MCN: So you're still in the field?


Rodgers:

Absolutely. And that's good. That's what we do.


MCN: What if one of AT&T's systems doesn't want his health network and wants your health network? What happens? I mean, do the AT&T systems go back to corporate and say, 'I think this deal is
better for us?'


Rodgers:

I don't know. That's their internal workings. I do know that we both have to try to sell it in.


Shell:

I totally echo what Johnathan says. A lot of people seem to have the power to say no.[Group laughter.]


Rodgers:

Just because they can.


Shell:

You'll find many examples where the system will want a service and corporate will say no; or corporate will want a service and the system will say, 'This doesn't work in our community. 'It has to be a unanimous decision or nothing gets done.


Townsend:

You have to start at the top and you have to start at the bottom and meet somewhere in the middle to get a decision. You need both those components. And it's not necessarily an objective decision that's being made. It could be because I have a friend who runs that system and has been my friend for 25 years. And I walk in and he says, 'You're on.'


MCN: Yeah.

Townsend:
Or if I walk into a system and I've got the best sales pitch in the world, and I don't get on. But his friend has been in before me. So there's no precise model of how it's done.


Anstrom:

Broadcasters took over retransmission consent, that's what happened.


Townsend:

The sports guys are asking for too much. [Group laughter.]


Shell:

I've got retrans and sports, it should be easy for me.


MCN: Is it? How easy or not easy is it for you, then?


Shell:

It's very difficult. It's a difficult environment.


MCN: Poor baby.


Shell:

It's a competitive environment.


MCN: Even, realistically speaking, with sports and retrans? You should be in the catbird seat, in theory.


Shell:

I go back to what I said before. Maybe I am naïve, but I believe that ultimately the market and consumers are going to determine the way the game ends. After all the machinations and all the leveraging is done, that's the way it's going to ultimately be determined. And if enough people want Bob's channel, he's going to get his carriage, eventually.

And all these leverage points, they're more a tactic that's used in the battle versus what's going to be the ultimate model of how it ends up working out.


MCN: Some of the MSOs are starting to bundle
services or digital programming or high-speed, data a little telephony here and there-are any of the
programmers getting any lift from these bundled packages?


Townsend:

Well, I haven't-


MCN: The marketers say bundling is the cat's pajamas.


Shell:

It's too early to tell.


Townsend:

Much the same way I'm a proponent of tiering, I'm not a proponent of bundling.


MCN: How come?

Townsend:
Because it limits your penetrations. If, in fact, you have a good product, it should be able to stand alone, and you should sell that. It's less confusing to the consumer.

The classic example I like to use is cereals. The best marketers, the best packagers in the world are cereal people. You've got to think about what they have. They have cardboard, they have foil, or cellophane. They have grain, either puffed, popped, condensed, or have done something to the grain, and they have sugar or non-sugar, or it's fortified or it's not.

And they've got to figure out how to take all those

basic qualities and put it in a cardboard box on a shelf that runs 200 feet, and compete in that marketplace. And so you say, 'I know how to fix that, I'll come up with the variety pack, so that everybody in my house can have what they want. 'Until the day, like in my case, I go to the cabinet and there are 72 boxes of Special K. [Group laughter.] And I swear, no more variety packs.


Shell:

That's the truth.


Anstrom:

That's a great analogy.


Townsend:

But if you go back to the cable industry and you look at Cablevision Systems with aggressive bundling where you had to buy through to get to HBO.


Shell:

I like Special K.


Townsend:

And their penetrations were low. And you can just go right down the line and the more complexity you put in a selling proposition, the harder it is.


Shell:

I don't know whether I'd come out pro or con on the bundling point, but the more interesting point is, on bundling and tiering and all of these different things, there's a certain point where consumers are like, 'Enough, give me something simple that I can buy. 'There's a reason why Microsoft [Corp.] is able to sell Excel and Word and everything packaged in one.


MCN: That's the intent for bundling.


Shell:

But Bob is exactly right. If in one of those components, you have a Special K in there, to use the analogy, you're going to get Special K.

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