The consolidation of Comcast Corp. and AT&T Broadband is not only affecting existing programmers, but is making it harder for some small independent networks to launch, according to sources trying to get such services off the ground.
"It's become a very, very unbalanced environment now," said one executive who is involved with a start-up network.
The problem is that it will be near impossible for a new network to succeed long term if it doesn't secure a deal with the 22-million subscriber mega-MSO, because it represent so many homes, according to several industry programming veterans.
"It's hard to imagine how you can make a business work without Comcast," one network official said.
Hole in donut
Added another executive: "If Comcast does not back and distribute you, then you don't have a chance anymore in succeeding in the digital environment, because there're just too many subscribers that are missing from your plan. It's impossible."
And at this juncture, some sources said that Comcast is primarily interested in launching Hispanic and African-American networks. For example, Comcast is investing in — and, on some systems, will roll out — TV One, the black-targeted network being created by radio giant Radio One Inc. and Alfred Liggins.
And Comcast is asking for substantial equity stakes in the new networks it partners with and invests in, sources said.
According to Comcast, it has not been company practice to require equity in a network in exchange for distribution. And even start-up networks backed by Comcast's programming-investments unit must negotiate with the MSO for distribution, according to Comcast executive vice president David Cohen.
"We make investments in a number of networks but those networks, sometimes to their frustration, then negotiate with our cable division like everybody else does [for carriage]," he said.
Comcast has been investing in new networks as part of its effort to expand its portfolio of content holdings, which already includes stakes in services such as QVC and E! Entertainment Television.
Comcast's expansion of its programming holdings has been an advantage to African-American startups such as Liggins' TV One, according to Cohen, helping them get off the ground. He added that Comcast has also bolstered new Spanish-language services by launching them on Comcast's Hispanic tier.
With TV One, Comcast and Radio One will each own just under 40% of the network. Comcast and some unnamed investors are putting $60 million in TV One, with Radio One investing $70 million.
Comcast has informed some programmers that it is not interested in adding linear networks to its digital platform, according to one source, unless they are oriented toward Hispanics or African-Americans.
That's because the giant cable operator is focused on integrating the former AT&T systems into its operations, and because it doesn't want to add any more to its digital-basic platform because its margins are being eroded.
"The only way to get launched is on a tier, unless your network is Hispanic or African-American," one source said.
So if you're a programmer with a new network that's not Hispanic- or black-targeted — and if you don't have ties to a big media conglomerate with a lot of cable services, like a Viacom Inc. — then the way into Comcast is now often through its programming-investments unit, which is headed up by executive vice president Amy Banse, several sources said.
Other executives who are involved in start-ups said they have been encouraged and hopeful about launches by Comcast, though — even though the MSO doesn't hold a stake and they are not targeting minority audiences.
"The real-estate space for cable is not unlimited," Cohen said. "Comcast's position, comparable to other MSOs, is that we're seeking unique and compelling programming to serve the varied interests of our customers, not necessarily programming just targeting a specific demographic."
Comcast not only giving new networks that it has ownership varying degrees of distribution on its systems, it is also spearheading their efforts to get carriage with other MSOs. Sources say that's why Allen Singer, AT&T's former senior vice president of programming, was recruited to work in Banse's unit.
Comcast is asking for a relatively large stake in new networks, a factor that reportedly made Fabulous TV, the hip-hop culture channel being created by hip-hop mogul Russell Simmons, walk away from the MSO, according to sources.
"If they invest in you, they'll take a huge piece of the pie," said one executive. "But they will distribute you, and they will also drive all the other operators to distribute you."
Another source claimed that Comcast is asking new networks for such a large stake that it doesn't give them enough leeway financially to get off the ground.
"So when you go out to raise $100 million, investors are being asked to put up $20 million each, and they want a certain percentage for that, and there's not enough of a percentage to go around," the source said. "If an investor is writing out a $20 million check, they may want 30% of your company, and pretty soon you've given out 200% of your company."
Comcast said the equity Banse's unit seeks varies on a case-by-case basis.
"The variables in Comcast's network investment are enormous and impossible to summarize in a 'rule of thumb,'" Cohen said. "Comcast's network investments have included a range of both financial and subscriber commitments."
Dennis Miller is managing director of Constellation Ventures, which is the lead outside investor in TV One. He said that his firm was willing to take a smaller stake in TV One because of the distribution edge it would gain through Comcast.
"Our position is we'd rather have a smaller part of a service with a better shot at distribution rather than slogging it out" with no guarantees of carriage from an MSO like Comcast, Miller said.
Cohen noted that even networks that Comcast owns outright or has large stakes in, like G4 and Style, are not "ubiquitously" carried by the MSO in all its homes.
"I don't think there's any unfair advantage to Comcast networks," Cohen said.
Some industry insiders claim that other big MSOs, such as Time Warner Cable, are taking their cue from Comcast and generally are not rolling out a network unless the Philadelphia-based operator is launching it, too.
"There is one operator you must do a deal with to drive all the others," meaning Comcast, one veteran executive said. "In the digital environment, there are not enough subscribers out here to support two competing networks in the same genre. So everybody wants to back the winner. Everyone wants to back a survivable network, so they are going to see what gets blessed."
Cohen acknowledged that Comcast is one of the distributors that start-ups have to approach.
"Obviously, with 21 million subscribers, we are one of five or six places new channels need to talk to about carriage, but we do that," Cohen said. "Even if we gave ubiquitous carriage, it [a start-up] still needs to get carriage elsewhere in order to be a viable channel."
Other MSOs know it
Cox Communications Inc. senior vice president of programming Bob Wilson said he doesn't wait for Comcast to do a carriage deal with a new network before Cox launches it. But Wilson agreed that there's more risk going forward and rolling out a start-up that doesn't have a distribution deal with Comcast, because carriage with the No. 1 operator will "have a dramatic impact on whether or not a network survives."
Time Warner also denied that it is only launching networks that Comcast rolls out, or is following the biggest MSO's lead.
"That's just not the case here at Time Warner," a Time Warner spokesman said. "We launch new programming services really based on their content and consumer demand."
He cited Time Warner's recent launch of The Tennis Channel as "one prime example" of how his MSO is doing its own thing.
Nonetheless, new networks don't have many options now that Comcast and AT&T have merged.
"It's like negotiating with AT&T or SSI [Satellite Services Inc., AT&T's old programming arm] or worse, because you can't walk away," that source said. "You could walk away from AT&T and hopefully make up a large enough subscriber base.
"But you can't walk away from a 22-million-subscriber MSO, so you have to do a deal even if it's a potentially bad deal."