What a Year It’s Been For Affiliates

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It’s not even half over, and 2004 has already been an eventful year in the annals of distributor-programmer relations.

After rancorous public squabbling with Cox Communications Inc., ESPN nailed down landmark long-term carriage deals with a half dozen major operators — not only Cox, but also Charter Communications Inc., the National Cable Television Cooperative, Cable One Inc. and Cablevision Systems Corp.

The ides of March brought more news. The two-year-long, simmering dispute between Cablevision and the Yankees Entertainment & Sports Network finally came to an end, when an arbitrator ruled that George Steinbrenner’s regional sports channel belonged on basic carriage.

DISH TROUBLE

Also in March, EchoStar Communications Corp. CEO Charlie Ergen went head-to-head with content king Viacom Inc., dropping 15 of its CBS owned-and-operated stations and 10 cable channels for 48 hours in a brouhaha during contract negotiations.

Once that street fight ended, things weren’t quiet for long. Soon Ergen was at it again, threatening to dump many of Turner Broadcasting System Inc.’s channels, including Cable News Network and Cartoon Network. Turner and EchoStar reached an agreement last Thursday.

Now that there has been time for the cable industry to digest those events, a number of officials maintain that what has happened in the first half of 2004 is further indication that in the grand scheme of things, leverage has shifted to programmers — the big programmers. That group includes the media conglomerates that also have broadcast holdings, namely Viacom Inc., The Walt Disney Co., Time Warner Inc., NBC and News Corp.

“The leverage has consolidated,” said Matt Polka, president of the American Cable Association, a lobbying group for small operators. “Those who control the content and the broadcasting have the leverage.”

The atmosphere this year, in terms of the sentiment in Washington and competition from direct-broadcast satellite, is weighing heavily against cable operators, many said. In this environment, retransmission consent — always a strong weapon in a programmer’s arsenal — has grown even more powerful in the hands of media conglomerates.

MSOs in particular risk raising Congress’s ire if they call attention to themselves by dropping broadcast stations in cable-carriage spats with programmers — more so than DBS providers. And now subscribers can switch to DBS.

'SILVER BULLET’

“Any MSO will tell you that [retransmission consent is] the silver bullet,” said one affiliate sales official. “You can basically get anything you want [with it], because no one can take off ABC, CBS or NBC without the government, the regulators, the politicians and the consumers wearing out the operators.”

As EchoStar spokesman Steve Caulk put it, retransmission consent permits programmers to use “the publicly owned airwaves as leverage to force us into unacceptable contractual arrangements.”

Media consolidation has been going on for years. The result today: the gulf, in terms of leverage and clout, between the behemoth programmers and MSOs — such as Viacom or Comcast — and the smaller players — the Court TVs and Mediacoms — has become huge.

“Operators are facing cable-network groups that are affiliated with broadcasters, and those groups have used their regulatory rights — most significantly, retrans — and generated what operators are saying are unwarranted license-fee pricing and distribution for new networks,” said Bob Rose, Court TV’s executive vice president of affiliate sales. “It’s an atmosphere where those network groups really don’t compete in an open market. It’s all retransmission-consent related, which is the trump card.”

Within the cable industry, not everyone agrees that leverage has demonstrably shifted to programmers.

After all, some officials pointed out, Comcast Corp. has been able to secure lower program costs, based on volume discounts, following its merger with AT&T Broadband. Cable operators currently have taken a sharp stand in Minnesota, refusing to carry the Minnesota Twins-owned Victory Sports network.

BOND SEES LEVERAGE

At top U.S. MSO Comcast (21.5 million customers), executive vice president of programming Matt Bond concedes “existing programming partners have plenty of leverage and plenty of clout.”

But he doesn’t acknowledge any monumental shift in the playing field. The world today is simply more complex.

“I don’t know that I would say that there’s a sea change in the relations between programmers and operators,” Bond said. “The relationships are more complicated, because programmers have consolidated to such a degree that each negotiation has a complicated array of channels involved. Additionally, you have these new platforms and technologies that enter into the discussion.”

“Ten years ago, you would have a discussion with a cable programmer that would be related to the distribution of one service on analog,” Bond said. “Now the discussion involves several services; it involves analog, digital, VOD, high def, broadband.”

Several programmers also said the balance of leverage remains about the same.

“I don’t see any material shift in the playing field,” said ESPN executive vice president of affiliate sales and marketing Sean Bratches. “Both parties need one another to continue to prosper.

“One of the driving issues of late has been the maturation of basic video package, in terms of growth and margin implications. That dynamic has lead to much of the discord.”

EchoStar’s spat with Viacom — over license-fee increases and an obligation to carry Nicktoons — was in some ways a case study in how a distributor can get jammed up in a dispute involving a media conglomerate, TV stations, cable networks and popular programming.

MUST-SEE TV

As EchoStar learned, consumers tend to have stronger allegiances to their favorite TV channels than they have to a cable company or DBS provider.

As one cable veteran put it, “There’s just an incredibly powerful portfolio of programming” that a distributor can’t do without.

Programmers, adept at consumer marketing, are experts at playing to the emotional ties viewers have to branded channels once a distributor drops a network: Viacom’s ads highlighted kids being denied SpongeBob SquarePants after EchoStar deleted Nick.

“The programmers really have an advantage,” one network executive said. “It’s very difficult for a cable operator or DBS company to drop a network, or even move it up to a tier, without having some outcry from their subscribers. Cable operators will tell you that a lot of the networks they’re giving distribution to from the big-network groups they had no interest in, their subscribers have no interest in, but were shoved down their throat as part of a deal.”

The other big programming news this year involved sports services, namely ESPN and YES Network.

ESPN’s new deals have been positioned by the sports programmer and MSOs as a win-win for both sides.

“It was a classic case of both sides meeting as close as they could in the middle,” said Jerry McKenna, vice president of strategic marketing for Cable One Inc., which is using the NCTC’s deal with ESPN.

ESPN reportedly agreed to a 7% annual rate hike, way below the 20% it has levied the past few years, in exchange for launches of its old and new services. Many cable-industry officials credited Cox’s information campaign to consumers — regarding ESPN and rising sports costs — with putting pressure on the programmer and perhaps ultimately prompting it to settle for the smaller increase.

ESPN WON, TOO

Some don’t see it quite that way, pointing out that ESPN won a 7% hike on a huge base: a $2 or so monthly license fee.

One veteran affiliate-sales executive gave Cox kudos for its PR campaign against ESPN, which he called one of the best an MSO has ever waged against a programmer.

“Cox was doing a better job than anyone I’ve seen making their case to the customer,” the official said. “But ultimately, I still think Cox would have lost if they had to drop it, because of the reasons we know: Customers don’t care why, they just want their channel back. People will switch platforms. You take ESPN off for more than a few days, and if people were inclined at all to go to satellite, they just go.

“I’m sure ESPN knew it was not going to get 20% a year for the next 10 years,” the executive said. “They knew that the wall was coming. I think what the operators did was turn the tide a bit, starting with Cox. I give them credit for standing up.”

Andy Dale, CEO of The Outdoor Channel, believes the ESPN deals, the YES resolution and EchoStar’s brief bout with Viacom all add up with content providers coming out ahead.

“People were wanting to tier ESPN, wanting to put it in sports tiers, carry it a la carte, they got none of that,” Dale said. “And a 7% increase is triple the rate of inflation. Jim Robbins fought a good fight, but ultimately there was no way that Cox was going to delete ESPN.”

Polka lauded ESPN for some of the concessions it made to his members, but he was still concerned about the tiering issue.

“Unless there is a significant structural change where these four or five major programmers allow changes to their model that will allow tiering on an optional basis at a system, it’s going to get changed for them, and for everybody,” Polka said.

RUPERT FACTOR

Some industry insiders suggested MSOs didn’t want to extract too much from ESPN, because that might hamstring the network’s ability to bid against Rupert Murdoch for sports rights, in case Murdoch does eventually try to cobble together a national sports network.

The YES ruling, while seen as a slam dunk for the regional sports channel, was almost considered an anomaly by some operators, as it involved an arbitrator and New York City — not a typical sports market.

“It was further evidence of a completely dysfunctional marketplace, where you have this decision that forced higher priced programming down to all consumers … at a time when there is an outcry over rising sports costs,” Polka said.

COST CRITICAL

Going forward, programming costs will continue to be an issue between distributors and networks.

“As long as programmers’ expectations on rate increases exceed what our customers are willing to accept, and what our political constituencies think we should be taking in terms of our increases, we’re to continue to have strained relations,” said Bob Wilson, Cox’s vice president of programming.

Ultimately, merger mania within the media sector is to blame for giving programmers an edge in today’s marketplace, and for fueling the contention between them and distributors, some cable officials said.

NCTC president Mike Pandzik sees “a historical seachange” as both programmers and distributors have grown larger.

“The industry has developed into eight major MSOs: There are seven, and then there’s the co-op, and what’s left wouldn’t fill a teacup,” Pandzik said. “The stakes have gotten mathematically bigger, as well, and you’ve seen some fistfights that have broken out. There have been even bigger fistfights that never broke out into the street.”

NO CONSOLATION

Before consolidation, many cable operators and content companies were founded and run by forward-thinking entrepreneurs or were family businesses. The short-term bottom line was important, but not necessarily paramount.

Media consolidation changed all that, in two important ways. Many of the players, on the programmer and distributor side, are now part of public companies that have aggressive double-digit growth goals that must be met for Wall Street and shareholders.

This financial pressure has raised the ante for everyone.

“We have Cox and ESPN going to the mat,” one affiliate sales official said. “We have Fox taking out ads when a regional sports network gets taken out. We’ve never had these kind of public, 'Now-I’m-going-to-bow-up-and-go-to-war-with-you’ fights before, and it’s all because the bigger guys have gotten bigger on both sides. It makes the fights much bigger, much tougher and much more volatile, because the stakes are so much higher.”

The second big factor is cable’s albatross: retransmission consent.

Consolidation put large numbers of TV stations and cable networks under one tent. With retransmission consent as the law of the land, media giants have not been shy about using it as a chit to leverage distribution of their new cable channels.

Having many cable networks under one roof also leads programmers to package them together, with popular services driving carriage of less-popular ones.

If a TV station opts for retransmission consent and can’t reach a carriage deal with a cable system, that system isn’t obligated to carry that broadcaster. In reality, it’s not much of an option, because local and federal officials have not looked kindly on cable operators pulling the plug on either TV stations or cable networks.

The deletion of ABC stations from Time Warner Cable systems, over Disney’s attempt to secure carriage for its new network SoapNet, sparked a public furor a few years back.

“When operators have tried to act fairly, unfortunately the consumer has never understood what they’re doing,” Rose said. “So unless the cable operator can prove to the consumer that cable is not the bad guy, which they clearly are not, the content providers will have the upper hand.”

RETRANS REDUX

Insight Communications Co. CEO Michael Willner blames retransmission consent for sparking many of the flare-ups between programmers and operators. He described it as “a government-mandated unnatural act” that gives an unfair, “unnatural advantage” to some program suppliers.

“That’s an area that always seems to blow up in the public domain,” Willner said. “But I don’t think that translates into a general statement that programmers and operators are fighting with each other more than ever when you carve out the unnatural impact that results from retransmission consent being part of the equation.”

Pandzik lamented the fact that DBS companies don’t seem to get the same time of scrutiny from Washington as MSOs do.

ERGEN FREE PASS?

“It’s fascinating the Charlie Ergen seems to be getting away with — with Viacom and now Turner — threats to drop, and actual drops, that a cable operator his size, with 10 million subs, would never be able to get away with,” Pandzik said. “Congress didn’t jump on him with both feet, the FCC didn’t jump on him with both feet. When Time Warner did some of that stuff in New York and elsewhere, they just got crucified. Everybody in Washington thought what a terrible thing they did, but yet the satellite guys do it and they get away with it.”

'HOTTER AND HOTTER’

There’s a contingent on the operator and network side disagreeing with Willner’s claim that relations between MSOs and networks are the same as they ever were.

“When we started Oxygen, we went on the air February 2000, I thought that the landscape between operators and programmers could never get worse,” Oxygen chairman Geraldine Laybourne said. “I was so wrong.

“It’s gotten hotter and hotter and hotter. That cannot be good for us, because programmers need to help figure out how to make the $75 billion investment for the cable operator work. And we need the cable operator to help us figure out how the future is not going to ruin the advertising business. So we need each other more then ever before, and so the increased contention is not a good thing, in any way, shape or form.”

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