The short-term tactics that media companies are resorting to in the intensified battle between content suppliers and distributors will do more harm than good to programming economics in the long term.

At the moment, all the players are grabbing on to whatever leverage they have and squeezing hard.

Cable operators who have bulked up on subscribers are trying to force an immediate halt to automatic double-digit fee increases from some of their biggest content suppliers-sending shock waves to the balance sheets of the media conglomerates that own them.

Comcast Corp. is leading the charge, using its unprecedented 22 million cable subscriber base as leverage. It recently notified all of its content providers of its plans to uniformly reduce its payments by 10 percent beginning this month, to save roughly $400 million of its $4 billion in annual program costs. Some of the bigger suppliers are balking and contemplating legal action to protect the payment terms in their existing contracts with Comcast and other cable operators, sources said. They view this as the opening salvo in what will be a long, bloody battle for economic power.

Even one of the smaller cable operators, Cablevision Systems, has demonstrated its gatekeeper’s powers by refusing to transmit New York Yankees baseball games at what it considers an unreasonable premium. Because it represents one third of the YES Networks’ regional coverage area, Cablevision’s stance is preventing YES from turning a profit.

What Comcast and its peers are really after is a forced a la carte system that will throw some of the more high-priced programming such as sports (which comprises more than 12 percent of the cable industry’s $15 billion in annual program-related expenses) onto pay tiers where it can pay its own way through additional subscriber fees.

Sources say existing contracts with the likes of ESPN prohibit any such move, although in the case of industrywide reform (government mandated or otherwise) anything is possible.

However, industry experts say the adoption of a true a la carte pay program tier is several years off, and the emerging initial video-on-demand services are a first step in that direction.

Even with all their growing scale, cable operators say such eventual drastic measures are the only way they can offset the higher-than-expected 18 percent to 20 percent rise in their program costs last year, according to JPMorgan analyst Jason Bazinet. Cable operators are expected to face anywhere from 12 percent to 18 percent increases in program-related costs in 2003, he said.

The prospect of ESPN’s not being allowed to levy an onerous 20 percent annual fee increase on operators and having to live with tiered program platforms and fees for its costly content could blow a big hole in the nearly $1 billion in annual profits ESPN delivers to its corporate parent, The Walt Disney Co.

In a recent earnings call with analysts and investors, Disney president Bob Iger acknowledged preliminary discussions with larger cable operators about long-term relationships that include such significant matters as the launch of new services, rate guarantees and retransmission consent.

“They know the value of ESPN,” Mr. Iger said. “And that value more than justifies our rate structure with them.”
Analysts increasingly see it as a financial risk to Disney and other content giants. “The higher-priced cable networks like ESPN could face more resistance in securing affiliate fees increases from the larger, increasingly more powerful cable operators such as Comcast,” Merrill Lynch analyst Jessica Reif Cohen said. And that in turn could cause economic upset not only to Disney but also to other major cable network owners.

Observed another leading industry analyst last week, “What we’re talking about here is nothing short of the upheaval of television programming economics as we know it today.”

It is that industry-rattling economic power shift that has made these skirmishes-being waged more fiercely behind the scenes than is being acknowledged-part of the Federal Communications Commission’s review of broadcast and cable regulations. That intense review returns almost daily to the concentration of power the FCC and Congress have created during the past decade in media conglomerates such as News Corp., Viacom and Disney.

In a deregulated environment, these media giants have learned to handily offset the failing financial fortunes of their leading broadcast networks with popular cable networks from ESPN to Fox News.

And Fox Entertainment Group has only just begun to demonstrate its savvy for using its highly rated branded sports and news cable networks, the hit series it produces and its largest TV station group in the United States to drive a hard bargain with cable and satellite providers. That clout will become even more formidable if and when its corporate parent News Corp. acquires Hughes Electronics’ DirecTV, the dominant U.S. satellite provider.

With that battle-of-the-titans mentality prevailing, it’s little wonder that GE-owned NBC is giving thought to fortifying its financially solid base through grand alliances or mergers with the only major content and distribution players left-Vivendi Universal and Sony Corp.-or with its peers (Viacom and AOL Time Warner, according to high-level sources).

What is fascinating about the struggle is that all of the players have ended up in the same place: grappling for financial relief and control even when they already have the support of two revenue streams, as cable operators do.

Of course, plugging this all into the bigger picture, it’s difficult to feel bad for large cable companies that promise to generate $1 billion-plus windfalls this year and next, even in a weak economy that has slowed the growth of new digital services and flattened basic subscriber levels.

Sources estimate the broadcast networks should get a $1 billion bump this year in advertising revenues from the reality series that have boosted their ratings and dominated their prime-time schedules.

Long-term, industry executives complain the reality craze will only skew broadcast networks’ expectations for the cost of talent and production as it applies to more expensive, traditional series comedies and dramas.

But for now, reality programming is an instant and welcome fix to what the broadcast networks otherwise see as a long, drawn-out battle to develop a second revenue stream. Their only hope is to force cable operators to pay cash for retransmission consent, or for programming that broadcast networks are providing free to new video-on-demand services.

One major media chief executive this week told me that he and his peers will have to stop bludgeoning each other long enough in the heat of battle for revenues and profits to devise some meaningful business alternatives. Pay for play, a la carte pricing, revenue sharing and extended duopoly TV station models could be among them.

“But we’ll never know what they can be unless we try sitting down and hammering these things out ourselves without the government getting involved. And I just don’t know if we’re going to get that chance,” the veteran media CEO told me. “Right now, everyone is too caught up in costs and clout.”

 

Content VS Distribution
 Battle heating up
 Byline: Diane Mermigas
 Electronic Media
 Pub date: 02/10/03
 Page: 0006
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