In Depth
High Stakes in Time Warner Cable-Viacom Standoff
Spat Tests Companies’ Pain Thresholds
Time Warner Cable’s decision to pay Viacom more to carry networks including MTV and Nickelodeon demonstrates that when programmers and cable operators fight over money, it’s the pipeline that feels the pinch first and faces more downside risk.
Viacom last week threatened to pull its 19 channels off Time Warner Cable systems in a carriage dispute. Time Warner Cable shot back, saying Viacom was just trying to compensate for lower ratings and advertising revenue at some of its networks by indirectly sticking it to cable subscribers.
Viacom reportedly got at least some of the 12% increase, or 23 cents per month per subscriber, it was seeking over the course of a multi-year deal, although the two companies were still working through the details at press time.
Derek Baine, an analyst at SNL Kagan, said that if Viacom got a 4% compound annual increase over three years, the hike would beat the inflation rate but hardly be the huge payday portrayed in the media—and by Time Warner Cable.
The current economic problems make it a bad time for both sides to play a high-stakes game of chicken. But the fact that cable companies are the first to have customer-service phone banks flooded with calls when channels go dark tilts the board in favor of content providers. For cable networks, the pain is delayed and only hits home if advertising revenue is crimped down the line.
“In these challenging economic times, cable operators are going to see howls from subscribers at the sign of any rate increase, not to mention additional churn that could come with it,” Mr. Baine said. “In this recession, carriage battles could become bloodier as consumers and multichannel operators are simply more price-sensitive.”
Mr. Baine said the Viacom-Time Warner Cable spat is the biggest dispute over license fees since Viacom pulled its signals from EchoStar for two days in March 2004.
Once an agreement was reached on New Year ’s Day, both side sounded pleased.
“We’ve been partners with Time Warner Cable for a long time, and we’re happy to be renewing that partnership for the benefit of their customers and our loyal viewers,” Philippe Dauman, president and CEO of Viacom, said in a statement. “It’s gratifying that we could reach an agreement that benefits not only our audiences but that is also in the best interest of both of our companies.”
“We are pleased that our customers will continue to be able to watch the programming they enjoy on MTV Networks,” said Glenn Britt, president and CEO of Time Warner Cable. “We are sorry they had to endure a day of public disagreement as we worked through this negotiation.”
The rhetoric was sharp before the agreement was struck, with Time Warner calling Viacom’s claims “misleading” and “insulting,” and Viacom calling the cable operator’s approach to negotiations “disappointing and unproductive.”
In preparation for pulling its signals, Viacom had created a barrage of advertisements featuring characters from its shows, including SpongeBob SquarePants, urging Time Warner Cable subscribers to complain if programming got pulled.
But when channels go dark, the cable system’s customer service phone banks absorb viewers’ outrage—and cancellations—before networks feel the pain of lost advertising revenue.
“I think Time Warner Cable has more to lose,” Thomas Eagan, senior research analyst at Collins Stewart, said before the settlement. “Either they pay higher affiliate fees to Viacom, or they don’t and they lose subscribers.”
Harold Vogel, a veteran media analyst and CEO of Vogel Capital, said he doubts the final agreement will give Viacom everything it is seeking.
“History is that compromise is usually reached,” he said. “That usually happens at the last hour.”
The push from a major cable programming company for more cash comes at the same time cable operators are being forced to pay more cash to local station operators (See related story, “Cable-Station Sparring Spikes.”) for permission to retransmit broadcast signals to subscribers.
But changes in the industry are altering the equation for cable companies fighting with programmers. Programming costs are becoming less significant to cable operators as their high-speed Internet access and telephone businesses grow.
“Video isn’t as big a portion of the revenue stream for them; therefore programming costs are not as big a part of their operating costs as they used to be,” Mr. Eagan said.
Still, cable operators lost subscribers in 2008, Mr. Eagan says. “So I think they don’t want to lose any more.”
Fighting a big operator is no picnic for programmer either.
“It’s a tough time for Viacom to pick a fight,” Mr. Baine said.
Viacom’s networks have been trailing the industry in advertising revenue growth; it also has had ratings problems at key outlets including BET, MTV and VH1.
“Although they are working hard to correct this, asking for a rate increase on these channels will be tough,” Mr. Baine said. “Viacom’s leverage comes in part from Nickelodeon. Although it’s the most expensive network in the MTV Networks stable at its average rate card of 45 cents per sub per month, that price seems cheap given the fact that it has much higher ratings than TNT (owned by Time Warner) and half the rate card.”
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Comments 39
Wiliam Patrick
If Time-Warner does another rate increase I am going to switch to AT&T U-Verse. I never watch any of that Viacom crap and I cannot see paying more for something I never watch. I hope ala cart comes soon. Why am I forced to support stuff where I don't reap any benefit.
Lynn
Strong words William Patrick. I watch all of the CBS/Viacom shows just as I watch much of ABC/Disney and FOX/FX. If Time Warner Cable pulls anything, I will stop paying the Cable portion of my bill and I will use an XPS Studio system or something similar as my DVR. Time Warner Cable doesn't want me and people like me to start looking for other ways of receiving audio and video. Right now Time Warner Cable TV is in place and it's easy - but it wouldn't take much for me to cancel "Cable TV" and use my Time Warner high speed internet for my home entertainment. They know that. Here's my $150.00 TWC! Keep negotiating and Get Even More Cool Stuff to Watch!!!
Mike
The grass is always greener folks. William, you think ala carte would make it cheaper? Think again. You will be paying more for each individual channel. Most of those networks in a group like MTV Networks cost you less as a package than they would for one network alone. Say you want Nick only, that .45 cents it costs now would be triple that if sold separately. Same with USA Networks, etc. Not because of the MSOs but because the programmers will feel they can charge more.
You think it is that easy to get all the programming you want through other sources. You will be surprised by how much is not available. By the way, those cool new toys you have such as DVR comes from the subscriber fees MSOs get from its customers. It allows them to put money into new technology. Nothing is free.
mika
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Take the poll, and leave a comment regarding the Time Warner Viacom deal. Who's going to pay for this?
jterhar
What percentage of the country has a choice of Cable TV providers? Competition helps a little but all the cable type providers are under the same pressure from the programmers. You are stuck, my friend, unless you are willing to limit your choices dramatically by using the rabbit ears and a digital receiver to get off air and a small pixilated computer picture as your entertainment sources. Needless to say, ESPN won't be one of those choices. Neither will USA, Bravo, Discovery channel and a bunch of others. Admit it. You are nothing more than the cable company's little "revenue generating unit"!
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