Tensions Are Rising

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Programmers and distributors got off to a rocky start this year, with EchoStar Communications Corp. and The Walt Disney Co. still embroiled in a court battle over carriage of ABC Family.

And it now looks as if that dispute between Disney and EchoStar — which had already dropped ESPN Classic from its direct-broadcast satellite lineup — is just the start of a particularly tense period for distributors and cable networks.

This year, several top-tier programming services — squeezed financially by the soft ad market and soaring sports-programming costs — will look to offset their shortfalls. As a result, they're raising their license fees — in some cases, substantially.

To justify the hefty rate hikes, some networks have cited ratings growth.

And operators, who are trying hard to rein in spiraling increases on that crucial expense line, are pushing back where they can. Many system executives said they could face some tough choices down the road.

Turner Network Television, Lifetime Television and Black Entertainment Television all have carriage deals that have expired or are about to lapse. All are or will be seeking rate increases from cable operators.

Earlier this month, one squabble over those increases made the newspapers. In one report, Cablevision Systems Corp. complained Lifetime was trying to levy a 150-percent hike — and hinted that basic-cable's primetime ratings leader could wind up dropped as a result.

"The ad market is forcing these networks to look at their affiliate fees and ask, 'How do we drive them up?' " said one longtime affiliate-sales chief. "It's going to be rough for both sides. You're going to see lines drawn in the sand, and the possibility of networks getting dropped in certain markets, or damage done to their sister services."

WHAT'S 'ESSENTIAL?'

The nastiness between programmers and distributors — as evidenced by the Disney-EchoStar spat — could escalate, particularly now that TNT is in the mix.

TNT has already acknowledged that it will seek a rate hike to help cover the cost of marquee acquisitions such as National Basketball Association games, National Association for Stock Car Racing events, off-network series and theatrical films.

"Each operator has to decide which programming is essential to carry," said Cable One Inc. vice president of programming and strategic marketing Jerry McKenna. "Every year, we have come to loggerheads and, in some cases, have dropped networks. It's a painful process."

Sports costs are a hot button for distributors, which each summer must fork over another 20 percent to Disney's ESPN. Those rate increases are built into their contracts.

ABC Family — the network that Disney acquired last year and EchoStar wants to drop — reportedly now has open affiliation contracts with a half-dozen MSOs, representing 37 million subscribers.

Time Warner Cable has a long-term deal with Lifetime, but is one of the MSOs in negotiations with ABC Family, according to MSO spokesman Mike Luftman.

"The general issue of cost is very much front-and-center for everyone," said Luftman, who declined further comment.

EchoStar, citing ABC Family's change in ownership from Fox Family Worldwide, planned to drop the network on Jan. 1, the same day it ditched Disney's ESPN Classic. But Disney, which claims EchoStar is just trying to wheedle a lower rate for ABC Family, won an injunction that has kept the service on Dish Network until a judge decides whether EchoStar can drop it. A hearing is set for next month.

That very public contretemps harkens back to two years ago, when Disney and Time Warner Cable bitterly battled over a variety of issues, including license fees and the carriage of Disney Channel on basic.

Time Warner briefly pulled ABC's owned-and-operated TV stations from its cable systems, creating a public-relations disaster for the MSO and a new low in distributor-programmer relations.

In EchoStar's case, the attempt to dump ABC Family has helped draw attention to the No. 2 satellite company — and fire for EchoStar's planned merger with No. 1 DirecTV Inc.

TROUBLE FROM TNT

There's other potential trouble brewing for distributors: Officials at TNT, part of AOL Time Warner Inc.'s stable, said they will seek "fair" rate increases to help foot the bill for programming such as its six-year, $2.2 billion National Basketball Association package.

TNT's rate card now stands at roughly 60 to 70 cents a month, per subscriber. TNT will ask for an increase of less than 15 cents, according to sources.

TNT hasn't said what it would withhold, but it could include product other than NBA games, like entertainment programming.

While Turner officials would not discuss their negotiations, the network has hinted that one alternate scenario considered could include offering a different product mix to operators — which may or may not contain some of its marquee programming.

McKenna said sports costs "are out of control," noting that News Corp. just had to take a $900-million write-down on the Fox broadcast network's pricey sports-rights deals. TNT is wrong to think that cable operators should bear the brunt of offsetting the new NBA deal, he said.

"They're going to run into a lot of resistance," he said. "Advertisers should be paying for these increases, not the distributors."

If TNT were to black out sports programming for MSOs who don't want to pay the increase, McKenna said: "Operators are going to have to ask, 'Without sports, what is the value of TNT? Is it essential? And should we reconsider carrying it?'"

But TNT has argued that the increases are not based solely on its NBA and NASCAR acquisitions, but also on entertainment programming — including first-run television rights for the popular Lord of The Rings
trilogy, worth a reported $160 million.

HELP FROM CONGRESS?

The American Cable Association, which represents small operators, has sought help from Washington. It's been lobbying for Congress to examine rising sports-programming costs and their impact on consumers.

ACA president Matt Polka expressed hope that Congress might conduct hearings on the issue soon.

"Obviously, a main focus of concern right now is what will happen to rates as a result of the NBA package on ESPN, ABC and TNT," Polka said. "We see those rates again going up precipitously and frankly, as a result of sports programming, which is completely spiraling out of control."

Bob Gessner, president of 45,000-subscriber Massillon Cable TV in Massillon, Ohio, said it's hard to pass on cost increases for sports to subscribers. That's because when games shift from broadcast to cable, the average consumer still sees the same number of games, and can't understand why his or her cable bill has increased.

"The problem is that cable customers are not getting any new programming," Gessner said. "How many NBA games do subscribers see now? How many will they see with the new contract? Probably not any more."

With all of its contracts open, ABC Family has denied that its plan was to seek a 15-cent increase had it snared part of the NBA package. As it turned out, ABC Family won't get any NBA games. An ABC Family spokesman declined to comment on whether the network is seeking rate hikes during its current talks.

Disney and Hearst Corp. co-own Lifetime, which last year climbed to No. 1 in the cable's primetime ratings. Emboldened by that success, Lifetime is seeking rate increases that will bring its license fee, which Kagan World Media puts at 15 cents a month per subscriber, more in line with comparable networks, sources said.

Lifetime, which contends it is undervalued, reportedly wants Cablevision to pay license fees in the mid-30-cent range.

Although that would more than double Lifetime's license fee, it would be still be far below what the lower-household-rated TNT is paid.

BET MAY BE NEXT

Another network looking to raise license fees it considers too low is Viacom Inc.'s BET. It will look to add one to three cents to its current 15-cent rate at the end of the year, when its contracts are up, sources said.

Viacom bought BET for $3 billion in 2000. Its ratings have started to rise of late, and Viacom could add leverage by tying BET in during contract talks for its MTV Networks programming stable.

BET representatives would not comment on any rate negotiations.

Lifetime also is apparently seeking to bring the license fees it gets from big MSOs in line with what smaller operators have paid.

The National Cable Television Cooperative doesn't have a contract with Lifetime. But the NCTC's senior vice president of programming, Frank Hughes, said co-op members are charged 20 to 25 cents, while some large MSOs pay only 10 cents.

"Whatever rate [the major MSOs] are looking at, they're still paying less than what small systems are paying," Hughes said. "This will be a very interesting year for cable-network contracts coming up for renewal. It will be a very difficult situation."

One small operator said he currently pays a license fee of just over 30 cents for Lifetime.

"[Cablevision CEO James] Dolan is basically saying, 'I don't want to pay what everyone else is paying,' " that operator said.

But the veteran affiliate-sales chief said that even if Lifetime has been historically underpriced, the network is unrealistic if it thinks it can convince Cablevision and others to ante up an "astronomical" 150-percent rate increase.

The veteran predicted networks like Lifetime and TNT may wind up going out of contract with some MSOs, continue tough negotiations and "ultimately find some middle ground."

Lifetime last week would only confirm that it is negotiating with Cablevision. The MSO couldn't be reached for comment last week, but previously issued a statement saying it hoped to resolve the matter.

"Every network wants a rate increase every year," Gessner said. "But some want a penny a year and some want 50 cents a year. At some point you have to ask, 'Is this network worth carrying?' "

Any operator would be hard-pressed to drop a top network like Lifetime at this time, especially since DBS providers offer it, according to Gessner, who is negotiating a renewal with the women's network.

"You can't be a modern cable operator and not carry the first and second tier of cable networks, and they [the programmers] know it," Gessner said.

Another small MSO executive contended that dropping popular services has to remain an option if operators are to have any leverage in negotiations.

"We have to consider dropping any network when we can't reach a good business agreement," said the operator, who is negotiating a new carriage agreement with Lifetime. "If we aren't prepared to consider that, then we should just give the networks whatever they ask for."

BACKLASH ON SPIN-OFFS

While an MSO may fear repercussions from dropping Lifetime or TNT over rate increases, an MSO could instead register its displeasure by dropping — or refusing to launch — a spin-off channel such as Lifetime Movie Network or Turner Classic Movies, the affiliate-sales veteran said.

In fact, that was the rationale EchoStar cited for dropping ESPN Classic. The DBS provider said it was making up for the double-digit rate increases that big brother ESPN collects each year.

In January, when EchoStar dumped ESPN Classic, it issued a statement that said: "The current dispute between EchoStar and Disney is simply about EchoStar trying to protect its customers from Disney, a giant media conglomerate that has imposed rate increases well beyond the rate of inflation.

"By far the No. 1 contributor to this vicious cycle is Disney's ESPN, which has raised its rates by a compounded 20 percent each year from 1998 to 2001. Over this four-year period, this price increase is 10 times the rate in inflation."

An ESPN spokeswoman said that a comparison of wholesale costs to the rate of inflation is "flawed," because inflation is more of an indicator of retail costs.

ESPN's wholesale costs also do not fully reflect the value of its programming, local-ad sales revenue and other services the network now provides, such as broadband and video-on-demand offerings.

DirecTV declined to comment last week on its situation, or on whether its deal with Lifetime or TNT is about to expire. EchoStar also declined to discuss that matter.

Simon Applebaum contributed to this story.

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