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Guest Commentary: MFN Clause Favors No One in Carriage Negotiations

Mar 16, 2008  •  Post A Comment

The television industry prides itself on innovation and its ability to stay ahead of the curve. When it comes to the rites of carriage negotiation, however, the industry is woefully behind.
Maybe it’s time to have a fresh look at one of the most time-honored traditions in negotiating programming contracts, the most favored nations (“MFN”) clause. As Charlie Ergen’s chief MFN pitbull at EchoStar, recently turned private practitioner and programming-side advocate, I should know.
This unique perspective has caused me to ask why, in this age of infinite programming and distribution choices, we continue to use a negotiating standard that was fashioned back in the day when remotes were still connected to the converter box via a 12-foot cord. I think we can agree that the time has certainly come for a new model, but what should we do to fix our legacy deals, and who stands to benefit from a change?
From a distributor perspective, the MFN clause provides an established, albeit rudimentary, means of keeping programming costs in check in a competitive retail environment. Since programming is typically one of the largest variable costs to the platforms, it would seem downright crazy for a distributor to enter into an affiliation agreement without some sort of wholesale rate benchmarking.
That said, we should all take note of the law of unintended consequences and recognize that, more often than not, the MFN results in inflated rates for content that might not otherwise survive in a free-market environment (yeah, you may be overpaying, but so is everyone else).
The unspoken reality is that the MFN, coupled with the tying of services, is what keeps underperforming and unneeded networks in prime channel locations while struggling independents, with genuine grassroots followings, remain off the air.
Moreover, it baffles me why distributors cling to a paradigm founded in conjecture, speculation and paranoia when empirical measurement is available, thus making it possible to negotiate license fees based on the real value to the platform: whether people are watching. We all know what distributors really want is the assurance of rate parity and some golden nugget that gives them a sense they actually got a deal that will advantage their broader business purposes.
Programmers may be able to give the distribution community exactly what it is looking for if distributors are willing to back off their antiquated MFN requirements. As it stands, the networks find themselves in the perfect “Catch-22”: Either Accept the terms, however irrational, and do their best to manage within the carefully negotiated constructs, or resist and risk losing both advertising and license fee revenues in the process. It’s a no-win situation in either case.
Given the potential liabilities stemming from the Sarbanes Oxley Public Company Accounting Reform & Investor Protection Act of 2002 and the massive dollar amounts associated with license fee revenues, it seems only a matter of time until there is some scandal about revenue recognition and MFN compliance. Many I’ve spoken with on the programming side envision a panacea in the form of an antitrust lawsuit or regulatory intervention. These two areas are not my main expertise, but it seems to me that vendors are loath to sue their largest customers, regulators are slow to move and both the collusion and damage to consumers will be difficult to demonstrate. In any event, why wait?
By pursuing free-market deals, programmers will both relieve themselves of potential liability and unlock the creative capacities that have built the world’s biggest brands.
Nice thought, but what can programmers offer operators that’s sweeter than a “guarantee”? The options are boundless.
One idea is to utilize the invigorated touch points and customer connections enjoyed by networks as a function of their new online assets to help further distributors’ distinct corporate strategies, thus providing tangible value in exchange for theoretical protection. This, coupled with publishing an industry rate card, could provide the coveted transparency, while also doing something unique enough with the operator/ customer to change the relationship into something more than a zero-sum game.
This is just one idea from a not-so-creative lawyer type, but in any event, the first step is for us, as an industry, to embrace a new era of programmer-distributor cooperation.
Now, am I so naïve to believe that a vendor-distributor relationship with billions of dollars at stake can, will or even should be completely devoid of acrimony? Of course not. But programmer-distributor cooperation isn’t just a suggestion; it’s a necessity when you stop to consider the ever-increasing challenges each group faces from regulatory threats and emerging technologies that disrupt existing distribution paradigms.
They say necessity is the mother of invention. If that’s the case, then it’s time to invent a new method of negotiating programming deals. We have the creativity and the know-how; now all we have to do is wake up to the tangible value of fresh ideas in carriage negotiations and set aside the stale models that are holding us all back.
Ken Tolle, a former VP of business affairs for EchoStar, is an attorney with Denver law firm Moye White LLP.

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