Warner Bros. Deal Concerns Operators

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On the eve of the much-anticipated digital pay-per-view
explosion, operators are upset that Warner Bros. has chosen this time to play hardball in
its contract negotiations with PPV network Viewer's Choice.

But observers said Warner Bros.' strong-arm tactics
will go a long way toward shaping the revenue infrastructure in the new multichannel-PPV
environment, as other studios evaluate their roles in the digital world.

At stake is revenue control of the burgeoning PPV-movie
business, which broke the $300 million mark in 1997, but which is expected to
exponentially grow once digital and near-video-on-demand become fixtures in cable
households.

Warner Bros. last week continued its stance of withholding
three of its February and March titles from Viewer's Choice while it seeks a bigger
cut of revenues from digital distribution of its films. The three movies include Contact
($101 million at the box office),Conspiracy Theory ($77 million) and Fire
Down Below
($16.2 million).

And it is stepping up the pressure against Viewer's
Choice. Sources close to the situation said the studio has waived its trademark early
window upfront-guarantee offer, allowing all operators to receive the movies at their
earliest PPV dates. Warner in the past has offered 30- to 45-day windows for operators
that pay upfront guarantees -- usually on buy-rates of between 2 percent and 4 percent.

While Warner has pitched the movies to Viewer's Choice
affiliates through TVN Entertainment Corp.'s C-band feed, most of the major
Viewer's Choice affiliates have refused to carry the movies. One top 10 MSO executive
said it would take a significant technological investment on the part of systems to be
able to receive TVN's C-band feed.

'It requires more than a 5 percent buy-rate movie is
worth,' said the operator.

Even if it was worth the cost, one top five MSO PPV
executive who requested anonymity said the operator doesn't want to give Warner or
any studio the upper hand in determining the future of digital.

'Just as we are on the verge of being able to deliver
what we all mutually agree is the right way to deliver PPV programming, Warner Bros. is
out to change the rules of the game before we know how successful the game is going to
be,' said the operator. 'Let's see how much bigger the pie gets before we
determine who gets the biggest piece.'

Cable operators control Viewer's Choice, so they have
an interest in seeing it maintain a strong position.

But at least one midsized Viewer's Choice affiliate
will take Warner Bros. up on its offer.

'They're offering some good movies, and it's
a chance for us to make some money,' said Gregg Graff, senior vice president of
marketing, programming and advertising for Coaxial Communications. 'Being a small
operator, we're not going to impact Viewer's Choice's overall bargaining
position.'

Some studio executives said Warner's move is necessary
for it to maintain its PPV objectives. With movie-production costs rising steeply and the
home-video business slumping, Hollywood wants to make sure that it gets full value for its
programming.

Also, studios argued that in a digital environment, where
there's more money to go around, there should be a greater sharing of the risk.

'What incentive does an operator have to market the
movie if there's no guarantee for them to reach?' asked one studio executive.
'If there was a guarantee involved and they weren't aggressive, then they'd
be on the hook, as well.'

Warner Bros. is not the first studio to try to alter the
digital environment. Paramount Pictures has yet to offer any of its movies to
Tele-Communications Inc.'s Headend in the Sky platform or to TVN's digital
service beyond local test markets, mostly because it's still unsure about piracy and
anti-copying issues.

But with Warner Bros. holding a minority interest in
Viewer's Choice, Hollywood is betting that the studio has a better-than-average
chance of bringing forth change.

However, Warner has a lot at risk, as well. While it is
holding three of its biggest PPV titles hostage, operators said it doesn't have many
more blockbuster titles coming down the pike. A failed mission here could lessen
Warner's bargaining power in the future, one operator said.

If Warner is successful, it would force middleman
distributors like Viewer's Choice to take pay cuts on margins that are already very
slim.

'We have the same issues as Viewer's Choice; we
clearly need a percentage of the revenue, like any other distributor,' said James
Ramo, president of TVN, which has a 32-channel NVOD platform and which has not reached a
digital distribution agreement with Warner Bros. 'Whether that comes from the
operator and the studios or the studio alone remains to be seen.'

Ramo said the studios might merit bigger splits if they can
provide the industry with something that will increase buy-rates, such as earlier windows
or exclusive cuts of films.

One distributor that will carry the movies is Request
Television, which has reached an agreement with Warner Bros. However, Hugh Panero,
president of Request, would only say that the network reached a deal that was beneficial
to both it and Warner. Unlike Viewer's Choice, which makes deals for its affiliates,
Request Television affiliates deal directly with the studios.

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