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Viability of AMC at Stake in TW Suit

Nov 24, 2003  •  Post A Comment

The legal battle between Rainbow Programming’s American Movie Classics and Time Warner Cable has implications that go beyond the vitriolic charges filed in a $250 million lawsuit (TelevisionWeek, Nov. 17).
The lawsuit charged that Time Warner Cable improperly announced termination of AMC’s carriage contract on the basis of changes made to its programming.
At stake are nothing less than the survival of AMC as a viable entity and, by implication, parent company Cablevision Systems’ restructuring plan centered on the new DBS service Voom. To succeed, the restructuring effort relies on cash flow from the Rainbow channels, especially AMC.
The legal imbroglio also calls into question a key aspect of the current cable television marketplace-whether networks such as Viacom’s Spike TV and Discovery Networks’ Fit TV have the right to make fundamental changes in the content they offer without having to undergo draconian renegotiation of their distribution agreements. It also shows that in an era of media concentration, some conglomerates, such as Rainbow, are less equal than others, such as Viacom and Time Warner, in the battle of media giants.
Neither Time Warner Cable nor AMC executives would comment for this article. However, the suit has been the buzz of the industry since it was filed Nov. 14. This past July, Time Warner Cable’s VP of Programming Lynne Costantini told TelevisionWeek, “It’s not all about ratings. We’re not in the business of leasing channels to programmers. When we do a deal with a programmer, it’s with specific content in mind to appeal to a specific demographic.”
“This reaction from [Cablevision Systems CEO James] Dolan, to pre-emptively sue these guys [Time Warner Cable], is a very aggressive act,” said one highly placed cable executive. “You only do that if you have concluded you have no other choice.”
A variety of sources in the cable industry said that if AMC had gone along with Time Warner’s demand for a lower per-sub fee or for placement on a digital tier, the channel’s future would be clouded. If AMC went along, other major cable system and satellite operators -especially industry giant Comcast-would demand the same concessions under most favored nation clauses, rendering AMC economically nonviable in short order. AMC currently collects an average of about 20 cents per subscriber from cable operators; bigger operators pay less.
The battle over cable program costs is likely to be protracted. Bernstein Research issued a report Oct. 31, which said programming amounts to about 25 percent of cable operator expenses. Bernstein analysts Craig Moffett and Amelia Wong wrote in the report, “Double-digit programming cost increases have been the norm in recent years. Over the three-year period from the start of 2000, programming expense at Cox, for example, has climbed at a compound annual growth rate of 12.3 percent, while the number of subscribers has grown only 0.8 percent annually. The numbers are similar for other MSOs. For Cablevision, we estimate that programming expense has grown at a 12.5 percent rate.”
The issue has become particularly heated between Cox Cable and ESPN, with the two waging a battle in the media and in consumer ads over ESPN’s requested 20 percent hike in sub fees.
One affiliate executive surmised that Time Warner Cable could be seeking to reduce its current sub fee to AMC from about 15 cents to about 8 cents, which would cost the network tens of millions of dollars a year. That could threaten its very survival at a time when Cablevision is already under Securities and Exchange Commission scrutiny in a controversy involving improperly stated revenue. This leads some to wonder if Time Warner isn’t taking advantage of a weakened Cablevision/Rainbow.
“Cablevision is one of the toughest negotiators out there,” noted Gabelli analyst Andrew Rittenberry. “It is unlikely its major programming deals have any holes in them. This is probably just TWX [Time Warner] trying to play hardball.” Gabelli Asset Management is a major holder of Cablevision stock.
Comcast would not comment on rumors that it was also demanding concessions from AMC. A spokesperson’s only comment was: “What we can say to you is that we have an agreement to carry AMC.”
Jason Bazinet, an analyst at JPMorgan Securities, said Cablevision had the ability to raise nearly $149 million in net incremental funding under the restructuring/spinoff plan by leveraging Rainbow’s earnings before interest, taxes, depreciation and amortization roughly six times. However, if, in a worst-case scenario, Time Warner drops AMC, Mr. Bazinet estimates Cablevision could lose almost $140 million in funding capacity. That assumes AMC’s contract with Time Warner generates $23 million in earnings.
Time Warner Cable first notified AMC on June 13 that it was abrogating its carriage deal, according to the lawsuit, and renewed this action Sept. 30. Time Warner Cable invoked what is called the content clause, a standard stipulation that was part of the original contract from 1993and provided that AMC was required to offer classic films. Time Warner claims that this included language that no films produced after 1993 be aired; AMC denies this language exists.
Affiliate executives familiar with these negotiations said last week that it is quite common for Time Warner Cable Executive VP Fred Dressler to invoke content issues in programming discussions and to use them for bargaining purposes. But it is rare for the content clause to be used to terminate an existing carriage agreement. Intriguingly, Cablevision, acting as an MSO, has had carriage issues with Turner Classic Movies, Time Warner’s AMC competitor. Some Cablevision Systems, such as the 801-channel system in Great Neck, Long Island, according to the company’s Web site, do not offer TCM but offer AMC. Subscribers in some Westchester county, N.Y., systems were recently told, however, they are soon to receive TCM, and systems in Fairfield County, Conn., offer TCM.
The implications in this legal fight could impact other cable channels that have undergone transformations, such as Discovery’s Health Network, which will become Fit TV Jan. 1, and Spike TV, which transformed itself from TNN: The National Network earlier this year. Bill Goodwin, executive VP of affiliate sales and marketing at Discovery Networks, noted that his company took pains with the Health Network to consult with operators in advance. “We haven’t got any pushback. Both channels are all about fitness, health and wellness,” Mr. Goodwin said.
And despite the fact that some operators, especially those in rural and southern areas, have publicly challenged the transformation of TNN into the male-oriented Spike TV, The National Cable Television Cooperative, which represents smaller operators, signed a long-term affiliation agreement with MTV Networks in September. It includes a per sub hike for Spike TV.
One rural operator, the 80,000 subscriber Galaxy Cable, based in Sikeston, Mo., has challenged Spike openly and refused to go along with the rate hike. In retaliation this summer, Viacom pulled five of its networks, including MTV, off Galaxy systems. Ron Dorchester, CEO of Galaxy, would not discuss the situation, commenting, “Galaxy is a private company and our relationship with Viacom is private.”
Robert Pini, a spokesperson for Spike TV, said Viacom channels are not currently being made available to Galaxy, which has hired an investment banker and is looking at a sale. Mr. Pini said that other than Galaxy, cable operators have not demanded renegotiation of Spike’s carriage agreements, despite the format change.
Rainbow, however, lacks the clout that Viacom can muster. Its programming-AMC, WE, Fuse and the Independent Film Channel-are clearly not as powerful in the marketplace as those of Viacom, and that makes AMC more vulnerable to this kind of pressure.