Are These TV's Next Big Blackouts?

Carriage Deals for ABC, ESPN, MTV, Discovery Expire This Year

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CBS and Time Warner Cable finally agreed on a new contract on Monday, ending a month-long blackout of the network in certain markets. But the deal isn't a fix for what's widely considered a broken TV model, meaning CBS probably won't be the last network to go dark this year as battles between content providers and cable and satellite operators intensify.

'SportsCenter' on ESPN, which Dish says it will drop this year 'simple as that' if it can't get a deal it likes
'SportsCenter' on ESPN, which Dish says it will drop this year 'simple as that' if it can't get a deal it likes

There's certainly little rest ahead for Time Warner Cable, whose deals with both Discovery Communications and Viacom expire before the end of the year. Playing hardball in particular with Viacom -- whose networks include MTV, Nickelodeon and Comedy Central but also smaller channels like MTV Jams and Palladia -- could serve to prove a point.

Time Warner Cable CEO Glenn Britt has been vocal in his desire to carry fewer channels that provide little appeal to subscribers. He told an investor conference last year that the company will review channels as their contracts come up for renewal and stop carrying the ones that don't represent a compelling value. And the company has already made good on this promise, dropping the small arts channel, Ovation, from its lineup earlier this year. But picking a fight with Viacom over MTV Jams would make a much bigger statement.

Cablevision has called out Viacom for the way it wields its portfolio, filing a lawsuit in February that claimed Viacom forced it to pay for 14 low-rated channels such as Palladia and Tr3s if it also wanted access to core networks like MTV and Nickelodeon. Refusing to carry those smaller channels would have incurred a $1 billion penalty, Cablevision alleged.

Viacom contends the case should be thrown out and that Cablevision should be bound by the contract it signed shortly before filing the lawsuit, adding that Cablevision accepted similar terms in 2008 and didn't complain then.

Pay-TV operators are also increasingly looking for rights to stream programming to their subscribers over the web -- rights that networks may want to sell elsewhere. That seemed to be a key issue in the CBS-Time Warner Cable dispute. Viacom went dark for nine days on DirecTV in July 2012, with one major point of contention being the availability of Viacom's programming streaming online.

It's worth noting that Viacom's overall cost is relatively low, in comparison to some at the high end at least. TV distributors pay a monthly average of about $3.30 per subscriber for Viacom's 25 channels, excluding Epix, a joint-venture with Lionsgate and MGM, according to estimates from SNL Kagan. The most costly cable network, ESPN, receives over $5 a month per subscriber.

MTV is about 43 cents per subscriber and Nickelodeon is about 60 cents, according to SNL Kagan, while MTV Jams is estimated at 3 cents per subscriber and Palladia is about 9 cents. But pay-TV companies will argue that even pennies per month add up when viewership remains low.

Viacom and Time Warner Cable declined to comment on upcoming negotiations.

Dish Chairman Charlie Ergen, meanwhile, has said he is willing to go dark on channels like ESPN if necessary when his company's agreement with Disney/ABC TV Group expires on Sept. 30.

"We'll work first and foremost to find a deal with Disney that makes sense for our customers," Mr. Ergen said on the company's earnings call last month. "If we get that deal, we'll do it. If we don't get that deal, we'll part ways. Simple as that."

Dish is often considered one of the most litigious players in the space, and doesn't easily shy away from public disputes. It has also been resolute in its desire to cut costs in part by dropping regional sports networks like MSG and Yes Network.

"If you take a really long-term view of it, somebody, sometime may decide that sports isn't something they have to have," Mr. Ergen said on the call. "And therefore, they can have a materially lower price for customers. And while they'll lose customers initially, they will gain customers long term, they'll be back in a growth pattern for gaining customers."

"There could be a day when strategically, companies just can't get together, where they go opposite directions and they both have strategies that work for them, and we're prepared to go either way," he added.

Negotiations will come shortly on the heels of a settlement in Dish and ESPN's three-year court battle over a prior carriage agreement. In 2009, Dish sued ESPN, alleging that the sports network had breached its contract by not extending the same carriage terms it provides to other pay-TV providers. The case was settled in March, with a federal jury awarding Dish about $4.9 million in damages, much less that the $153 million it had been seeking.

Ad-skipping DVR in the mix
To add to the potential for drama, Dish is also currently battling ABC, along with other broadcasters, in court over its Hopper DVR's ad-skipping feature. It wouldn't be the first time for Dish that a lawsuit impacted carriage negotiations. Last year, the company's long-running dispute with Cablevision over its Voom channels seeped into its carriage negotiations with AMC Networks, which was spun off from Cablevision in July 2011. Dish dropped AMC, citing lackluster ratings for most of the network's programming, but AMC contended it was being used as leverage in the Voom settlement.

Dish could try to use AutoHop, the Hopper's ad-skipping feature, as leverage against inflation in content costs, potentially agreeing to block the ad-skipping functionality in exchange for lower price hikes from TV networks. But it would be unwieldy to enable ad-skipping for some networks and not others. It's even more likely that Disney will try to turn AutoHop against Dish in their upcoming talks, seeking concessions to make up for the impact on commercials' audiences.

Disney/ABC TV Group declined to comment on the upcoming negotiation.

While Dish and Time Warner Cable may look to prove a point in the upcoming talks, TV networks still have the upper hand, said RBC Capital Markets analyst David Bank. "Content is well positioned to win every time this happens," he said.

"It's the nature of the ecosystem," Mr. Bank added. "Government regulation would be the only thing to move this invisible hand, but I don't see that happening."

So then why are pay-TV providers bothering to engage in these battles, which end up aggravating consumers?

"I think you will see more distributors fighting harder hoping to win in the court of public opinion," Mr. Bank said. "I don't think realistically they expect to win any one of these individual battles, but by fighting enough of these are trying to win the war by getting the government involved, which I just don't think will happen."

Time Warner Cable was looking to take advantage of a moment in time to score points with regulators, said Todd Juenger, analyst at Bernstein Research.

In a statement following Time Warner Cable's deal with CBS, Mr. Britt said: "We are also encouraged by the 50 plus consumer organizations and legislators that supported our call for Congress and the FCC to reassess the 1992 retransmission consent rules. The rules are woefully out of date, are the primary reason cable bills are risings, and too frequently leave our customers without the programming they love. We sincerely hope that policymakers heed that call and take action to prevent these unfortunate blackouts soon."

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