The natural antagonism between major multiple cable system operators and the program service providers has been escalating in the wake of industry consolidation, the weak economy and the rising cost of program and sports rights.
MSOs, led by the industry’s largest, Comcast, have shown increasing willingness to use their size to force programmers, particularly those with multiple cable channels, into giving discounts or running the risk of having channels dropped as punishment for not cutting fees. “I think every operator is trying to find its own pressure point-that break-even point for a network where you know how many subscribers you can lose before it is not worthwhile to drop a channel,” said one executive of a large MSO.
As cable operators and programmers draw their respective lines in the sand, much of the attention has focused on ESPN and its proposal to raise programming rates by as much as 20 percent this year.
But cable operators might want to brace themselves for a bad case of future sticker shock. News Corp.’s Fox News Channel, the hugely successful cable network that currently pays cable operators $10 per subscriber per month for placement on cable systems’ channels, is likely to sing a different tune when it comes time to renegotiate its next round of long-term contracts with MSOs.
Instead of being the payer, Fox News is likely to push for becoming the payee, getting MSOs to pay for the popular news channel, which has surged in the ratings and regularly beats AOL Time Warner’s veteran Cable News Network.
The talks are still a couple of years away, since the current 10-year contracts don’t expire until 2006. Plus, there is no indication that discussions between FNC and cable operators will be acrimonious when they do begin. However, FNC insiders acknowledge that when the time for new contract talks do start, the network will enter the negotiations knowing the landscape, for both the network and the industry, will be radically different from 1996, when the channel debuted.
A Fox News spokeswoman declined to discuss the network’s negotiation strategies.
Exactly how things will shake out between operators and Fox News is anyone’s guess at this point. But the industry is on a kind of heightened alert already, thanks to the imbroglio brewing between operators and ESPN over the rate hikes the popular sports channel is asking MSOs to pay.
As part of ESPN’s multiyear contract with many operators, the sports cable network has the right to hike the programming rates as much as 20 percent each year for the life of a contract. The network’s plan to do just that this year has drawn protest from MSOs, which are under fire from consumers upset that their cable bills have increased on average faster than the rate of inflation.
ESPN, which Kagan World Media said charged MSOs an average of $1.50 per subscriber in 2002, is the most expensive cable channel operators pay for, and could hit as much as $2 per sub with the new rate hike. Much of the increase is due to the rise in fees paid to professional sports leagues for the right to broadcast games.
The brouhaha has sparked scrutiny by Congress and has given some strength to the concept of tiering certain cable channels-effectively forcing consumers who want specific kinds of programming, such as sports, to pay directly for that content, while sparing disinterested consumers from rate hikes associated with that content. How those negotiations between ESPN and the operators are settled could provide a glimpse into how other channels’ contracts might be structured, executives at cable programmers and operators say.
To be sure, the back-and-forth between cable operators and programmers is nothing new. MSOs have long wanted to pay less for programming, while cable channels have always believed their programming fees should go up as they bolster content.
However, there are some stark differences this time around, programmers and operators suggest. First off, what had largely been a private battle has turned public as MSO executives and programming executives defend their point of view. And while a good deal of the rhetoric is posturing, industry observers say, there is a sense among veterans that some threats being made by the opposing camps are less a threat than a promise. “This is more than just saber rattling,” said a former cable channel executive.
Indeed, several operators said they are feeling empowered in the wake of this spring’s deal between Cablevision Systems and the YES Network. After rebuffing YES’s insistence on being packaged with Cablevision’s basic service, the cable operator agreed to make the network available as part of a premium sports programming package or to customers willing to pay $1.95 a month for the channel.
“After the YES deal, some operators felt emboldened,” said an affiliate executive at one cable network.
What’s more, some of the bigger MSOs have begun diversifying their revenue base to limit their reliance on the video business. And while those efforts are in the early stages, executives at some operators are bullish the growth in high-margin businesses like high-speed data and telephony can further bolster their negotiating power over programmers.
“Nirvana for me is that in five to six years video is a much smaller share of the overall revenue, so if we drop a network because we are getting killed by rate increases, we lose just 5 percent of customers,” said the MSO executive. “That is different from when video is 70 [percent] to 80 percent of our revenue.”
For their part, cable programmers are finding themselves having to justify their existence to the operators. Rosa Gatti, a senior VP at ESPN, said that the unique circumstances of the channel lead to the prices that the network commands. She noted ESPN is a rare breed of channel given its huge volume of onetime, nonrepeatable events. “Unlike sitcoms and movies, the nature of the programming is live and original,” she said.
But she added that the network delivers the type of audience that advertisers crave and has been credited with helping drive cable operators’ new businesses, including broadband, interactive and high-definition TV.
Plus, programmers have a potential ace up their sleeve in the growth of satellite. John Mansell, a senior analyst at Kagan World Media, noted that amid the posturing taking place between the cable operators and programmers, satellite continues to expand its subscriber base beyond rural customers.
With satellite’s trying to steal cable subscribers, and cable operators’ needing more channels to fill as digital systems expand capacity into the hundreds, Mr. Mansell believes programmers still might have the upper hand in the end as they control the content cable operators need to fill that extra capacity. “This is little more than a mating dance,” he said.