Turner Network Television's strategy of increasing license fees within its existing carriage deals by shifting valuable programming to a new pseudo-network could, if successful, change the dynamics of already complex and tense contract talks with operators, industry executives said.
Looking to extract a 10 percent rate hike from existing affiliates in the middle of multiyear contracts, Turner Broadcasting System Inc. is actually selling a new network — "TNT Plus" — that as of Jan. 1 would offer all of TNT's existing programming, including National Basketball Association and National Association for Stock Car Auto Racing (NASCAR) fare.
Operators with existing contracts who decline to ante up the rate increases will continue to receive the "current" TNT service — but without those marquee sports properties.
The network's on-air look would remain the same, and TNT would provide replacement content to fill in for blacked-out sports fare.
Industry sources called TNT's move a bold attempt to extract higher license fees while not violating current agreements with operators.
All new contracts for TNT refer to the "drama" channel as TNT Plus, not TNT, sources close to the situation added.
Won't be easy
Observers said it could be difficult for AOL Time Warner Inc.-owned TNT to get the contract revisions it wants from such big affiliates as Time Warner Cable, Comcast Corp., AT&T Broadband and Cablevision Systems Corp., whose deals don't expire until at least the end of 2003.
Officials at Comcast, which is finalizing its merger with AT&T Broadband, declined to comment, as did a Time Warner Cable spokesman. AT&T Broadband and Cablevision executives did not return calls by press time.
The National Cable Television Cooperative, representing many small cable operators, recently signed a long-term deal for TNT Plus, but the co-op would not reveal specific details. Officials with other operators would not comment on whether they were negotiating deals for TNT Plus.
The ploy would allow the 86 million subscriber service to effectively subvert its current licensing deal, which charges operators about 70 cents per subscriber.
The new arrangement escalates rates for TNT Plus by 10 percent per year for the next five years, beginning Jan. 1. Operators whose current TNT deals expire at year's end will have only the TNT Plus option from which to choose.
Turner president of domestic distribution Andy Heller would not comment on the actual contract language, or on the progress of negotiations.
He said, though, that the network intends to honor its contracts "to the extent that they extend to the end of [this] year."
Heller believes that both the NASCAR and NBA coverage — both currently on TNT's lineup — are not inherently part of the network's current affiliation deal.
"I did not promise anyone that I would be delivering basketball on TNT after the expiration of the [NBA] contract [last season]," Heller said. "I didn't promise anyone NASCAR, because I hadn't bought it yet" at the beginning of the current deal.
While he expects to have deals with every MSO for TNT Plus by Jan. 1, he said Turner is prepared to offer two feeds of the network if necessary.
"To the extent that I have an obligation to provide TNT, I'm going to do it," Heller said. "If it becomes necessary to have two different networks, I'll have two different networks."
Heller: No suprise
The new rates shouldn't come as a surprise to operators, who were notified of a potential rate increase prior to the network's decision to renew its NBA deal, Heller said.
"Nobody likes having to pay extra money in a difficult economic environment, but we feel we did a responsible deal with the NBA," he said. "I'm trying to give people options, while at the same time build and run a business without putting myself so deep in a hole that I can't afford to run it."
Not surprisingly, some operators and industry observers disagree.
"I don't think they have a winning or legal argument," said one network executive. "But even if they did, the MSOs would have to fight them tooth and nail because if they let them win on this, it's a green light for all of us who have hit shows or expensive programming on our channels and deals that go out more than a year."
MSO executives and network officials called TNT's attempt to set new rate terms within an existing contract an unprecedented maneuver.
"Usually, we get pitched [new rates] at the end of the contract, so TNT's move is highly unusual," said NCTC senior vice president of programming Frank Hughes.
Regional sports networks have often attempted to extract additional fees from operators for new programming acquisitions, despite existing multiyear contracts.
But sports-network executives argue that those surcharges are for incremental programming and not for the content in the original contract.
Operators are worried that TNT's maneuver could open the floodgates for other basic networks to ram through similar mid-contract rate increases, triggered by new acquisitions or successful programs.
"What's to stop an MTV [Music Television] from moving The Osbournes
to an MTV Plus service and charging operators for the service even though they have a long-term deal for the network?" one MSO executive asked.
Some on the network side swore off trying to open up existing deals to sweeten license fees because of newly acquired programming.
"When our current network deals end, we will not sell the channel short, but we will honor the deals that we have and are not planning to do something slippery to extricate any extra value from operators," said one network affiliate-sales executive.
Yet the same network executive admitted that if TNT succeeds, he might be forced to re-evaluate negotiating strategies.
"I think we'd be under pressure to consider it," admitted the source. "If TNT succeeds with this, my bosses would say, 'What do they know that you don't know?' "
Ad sales impact
If Turner can't reach deals for TNT Plus, it could have a major impact on the network's ad-sales efforts for the sports.
Network officials said that Turner has sold about 75 percent of its NBA inventory, but it's unclear whether the ads sold are for the whole season, based on TNT's current base of 86 million subscribers.
Were TNT unable to deliver the nearly 25 million AT&T, Comcast and Cablevision subscribers, it may be forced to provide advertisers with millions of dollars in make-goods.
That's one reason some industry observers believe TNT is merely playing chicken to get operators who have long-term pacts to buy into the TNT Plus service.
"Basically, this is a bluff and they don't have the right to do this," said one industry observer. "The operators will call their bluff, and this will all fold like a house of cards."
Heller unequivocally said TNT has every intention to follow through with its plans.
TNT is seeking the rate increase to help subsidize a significant increase in programming costs, mostly related to its six-year, $2.2 billion NBA deal, as well as costs for its popular NASCAR programming.
Granted, TNT's new NBA package is much stronger than its previous deal. The new agreement gives the network 52 regular-season games, largely scheduled as exclusive Thursday-night doubleheaders with no pro-hoops competition from regional services or local TV stations.
The channel will also run up to 45 playoff games — including one exclusive conference-finals series and both conference-semifinals rounds, in their entirety. And, in a cable first, the NBA All-Star Game will air on TNT.
Just two weeks ago, the network reached a seven-year, $30 million deal for rights to golf's British Open tournament — more than triple what ESPN paid under the previous contract for the major tourney.
Along with sports, the network is still paying for acquisitions of such high-profile, off-network series as Law and Order, ER
and NYPD Blue. The network is also part of several high-profile theatrical acquisitions with sister network TBS Superstation.
TNT also remains aggressive in developing original movies, but has no immediate plans to develop scripted original series. TNT two months ago cancelled its only original skein, Witchblade, after two seasons.
TNT has enjoyed a recent increase in the ratings. Its third-quarter household ratings were up 20 percent, to a 1.8 average, compared to the same span last year, according to Nielsen Media Research data.
Boosted by its original and acquired movies, the network was tops in the industry during the quarter in reaching the advertiser-coveted and network-targeted 18-to-49 demographic.