In yet another flare-up between programmers and cable operators, the National Cable TVCooperative filed suit against Viacom International Inc. over a rate increase that its MTVNetworks Inc. unit levied last year.
The civil suit, alleging breach of contract, was filed in U.S. District Court in KansasCity, Kan. The NCTC charged that a license-fee hike that MTVN imposed effective last Aug.1, which raised Nickelodeon's rate 17 percent and increased penetration requirementsfor license-fee discounts, was in violation of the deal that it had with the programmer.The NCTC also wants proof that all of MTVN's affiliates got the same increase.
The Lenexa, Kan.-based NCTC represents 960 cable operators with 9 million subscribersin small towns and rural communities. The NCTC, as a group purchaser, negotiatesaffiliation deals with programmers on behalf of its cable-system members, obtaining volumediscounts for them by acting as if they made up one large MSO.
In the suit, filed June 12, the NCTC also raised objections to MTVN's bundling ofits networks the practice of tying rate discounts to operators carrying severalservices. The co-op members typically want to carry popular Nick, but they claimed thatthey are being financially penalized for not carrying MTV: Music Television anetwork that often isn't welcome in the kinds of small-town communities that NCTCsystems typically serve.
The proposed MTVN rate increases would raise license fees in aggregate for theNCTC's members by about $250,000 per month. From August 1997 through May of thisyear, those increases amounted to about $2.2 million, the suit said.
The lawsuit was sparked by MTVN's alleged refusal to explain whether the rateadjustment that it was making for the NCTC unveiled in mid-contract last June was "part of a cable industrywide rate increase or modification,"as a contract clause mandates.
The contract gives MTVN the right to increase rates, with 60 daysnotice, as long as it's being done industrywide. The NCTC wants to know if every MTVNaffiliate including major MSOs such as Tele-Communications Inc. and Time WarnerCable got the same rate increase.
The NCTC and MTVN have been trying to resolve their dispute out ofcourt for months, to no avail. The co-op has been holding the increase in escrow.
"We've tried over the past year to resolve this situationamicably, and it's unfortunate that MTV's conduct made this actionnecessary," said Frank Hughes, the NCTC's senior vice president of programming."We have an obligation to our member companies to ensure that the terms andconditions of our programming agreements are enforced."
According to the suit, the increase that MTVN put forth last summerresulted in Nick's license fee jumping by 17 percent from January 1997 to January1998. Nick's rate to the NCTC, as of Aug. 1, 1997, went to roughly 32 cents persubscriber, per month, which includes a 15 percent volume discount and a 30 percentcombined-penetration discount. In addition, the modifications raised the combineddistribution levels that the NCTC had to have for MTVN's three networks Nick,MTV and VH1 to qualify for the 30 percent-penetration discount.
Previously, NCTC members only needed the penetration percentage of thethree networks, in any combination, to total 255 percent. But last year's proposedchanges raised that threshold to 270 percent a "drastic" difference,according to a July 25, 1997, letter that Hughes wrote to MTVN. A copy of that letter wasfiled as part of the lawsuit.
"The result of this change is that most smaller, rural cablesystems that don't feel that MTV would be suitable in their communities would pay 68percent more for Nickelodeon," Hughes wrote to MTVN vice president of affiliate salesand marketing Elizabeth Posner. "Your continued practice of 'tying' theservices together has gotten to the point where it is almost illegal in our view."
The flat rate, without any discounts, was 53 cents per subscriber, permonth for Nick last year. The NCTC's contract with MTVN expires June 30, 2000.
Because of the dispute, MTVN has threatened to terminate itsrelationship with the NCTC and to negotiate directly with its members. MTVN has also sentits standard affiliation agreement including the current rate cards with thecontested increased license fees to each NCTC member that is now carrying itsnetworks.
The NCTC charged that these moves by MTVN will destroy its bargainingpower.
"If this happens, many small-town and rural cable-televisionsubscribers will be subjected to unjustified higher rates," the suit alleged.
That's because of the NCTC's inability to negotiate volumediscounts at "the lower end" of the ones that MSOs such as TCI and Time Warnerobtain which are in the range of 40 percent to 60 percent, or more, according tothe suit.
In January, the NCTC suggested that MTVN pick an accounting firm toaudit the programmer's affiliates and to survey rate-increase data, with the co-oppicking up one-half of the cost of the financial review. Such an audit would confirm ifthe rate increase had been "industrywide," the suit said, but MTVN neverresponded.
Of the NCTC's nearly 9 million subscribers, 4.3 million get Nick,4.1 million get MTV and 3.7 million have VH1, the suit said.
Cable operators particularly small ones are sensitiveabout new license-fee increases from networks, and they are examining every penny of theirprogram costs. One of the programmers that is likely to be scrutinized next, and that ispotentially vulnerable to switch-outs, is FX.
FX affiliate-sales reps are already floating a rate card for next yearat roughly 28 cents per subscriber, per month the current rate even thoughthe network won't have retransmission consent as a bargaining chip for the nextcontract. Fox TV stations will be negotiating their own retransmission deals thisgo-around, and FX won't be part of them.
FX officials maintained that the network is very different than it waswhen it launched in 1994, with much better programming. It is airing reruns of TheX-Files and NYPD Blue, boosting its primetime ratings in the key 18-to-49demographic. In addition, FX beat several major networks to acquire Buffy the VampireSlayer, and the network will debut several new original series this summer. And FX nowhas Major League Baseball.
"Retransmission or no retransmission, this is a service thatstands out," said Mark Sonnenberg, executive vice president of FX Networks."We've made aggressive moves to build the value of this network."
But some MSO officials claimed that this wasn't enough to fill thegap that was left, in terms of the network's worth, without retransmission consent.According to Jedd Palmer, MediaOne's senior vice president of programming, "28cents is a stretch for that product [FX] ... A national-baseball package has no value.There's not enough appeal for out-of-market games. There's too much localproduct."
At least one operator said FX really can't be considered as astand-alone network, and it may be buffered even without retransmission consent, since itsdeals are, in some cases, tied to those of the Fox regional-sports channels.
"There is a linkage at the table to FX carriage and rates andsports-channel carriage and rates," Cable One president Thomas Might said. MCN