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Why Mom and Dad Fight

Cable operators and networks keep threatening divorce

Photo via Getty Images

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If you've read any decent media coverage in the last few weeks, you could be forgiven for coming to the conclusion that networks and cable operators have all gone totally bonkers at once. Viacom and DirecTV froze 20 million viewers out of MTV, Comedy Central, Nickelodeon and nearly two dozen other channels for a full ten days, eventually coming to terms on a new seven-year contract in the $600 million range, according to Bernstein Research. Time Warner Cable (TWC) just reached an agreement after a lengthy refusal to pay increased retrans fees to Hearst stations, repurposed up a bunch of Nexstar signals to replace them, and is now being sued by Nexstar. And it's starting to look like AMC is never coming back to Dish Network.

That's three different carriage disputes running simultaneously within a single week, which is not good. These conflicts hurt ratings for the networks, drain subscriptions from multi-system operators (MSOs—TWC, Cablevision, Comcast, etc.), and leave consumers feeling hacked off and overcharged. And with the competition between MSOs and streaming services like Netflix heating up, no MSO wants to end up limiting its viewer's options—the only advantage cable operators have left is access to more first-run content.

 

So why is it all going down now? I'm so glad you asked.

 

1) Netflix. Well, Netflix and Amazon, Hulu, Vudu, and half a dozen other content providers, including the networks' own websites. Consumers like these services; they don't require you to set aside a six-hour window to wait for a cable guy who probably won't show up, they don't cost an outrageous amount of money, and they allow you to watch whatever you're interested in watching when you have time, rather than having to schedule an appointment with your television set.

This, really, is just the endgame that started during the DVD boom a few years ago when consumers were finally able to get digital content, which gave them, for the first time, access to entertainment media that didn't degrade over time (there's a reason nobody was worried about VHS piracy). Streaming content makes that even easier. If you can watch a digital copy of a television show with no ads any time you want, why would you ever go back to watching live TV for anything but sports? That's the question a lot of viewers are asking themselves, and it's led to quite a few cable cancellations, especially among young people.

That, obviously, is not something MSOs are excited about. They shell out billions for these networks, and the premiums almost always go up on renegotiation. To add insult to injury, most MSOs also provide internet service (in fact, that's a huge growth area at the moment), so when a user cancels his cable subscription and quadruples his internet usage to make up for it, he's taxing the network, paying you less, and getting as much or more content than he got through his cable subscription, for which he pays somebody else. AMC and Viacom both stream loads of their content through shows' websites and third parties like Netflix, and when the come a-knocking for a rate hike, cable operators are a lot less agreeable than they were five years ago.

That's not to put it all on the networks. Cable operators have the capacity to provide on-demand content at a much higher level than any of those streaming services; many of them just haven't bothered. From a content provider's perspective, if you're too lazy, complacent or disorganized to compete with a new technology that consumers love, you deserve what you get. Jeff Bewkes, CEO of Time Warner (no relation to Time Warner Cable) has been a vocal proponent of this tactic, going so far as to beg groups of investors to strong-arm MSO's into adopting authentication services like TV Everywhere, which will let them create a Netflix-style interface for their customers with more access to better programming. But only a few have complied, and with the success of Time Warner's own HBO GO staring everybody in the face, it's easy to understand that frustration. The Viacom/DirecTV dispute ended with DirecTV adding Viacom programs to its own TV Everywhere service.

 

2) Bundling. MSO's HATE bundling. Cablevision is begging the FCC to make it illegal. Bundling, for the uninitiated, is what happens when a large conglomerate like, say, NBCUniversal owns a bunch of popular, established channels like USA, Syfy and Bravo, and a bunch of younger or struggling channels—Style, G4, Oxygen. MSOs would much rather leave the unpopular channels by the side of the road, but no dice: if you want USA, you're going to have to pay for G4, too. NBCU is notable in that they haven't had a high-profile carriage dispute recently despite carrying dozens of cable networks; Viacom, however, was trying to get traction for its fledgling premium channel EPIX, and DirecTV balked (Viacom eventually backed down). AMC is in the same boat with Dish and its network WeTV.

This practice has gone on for years, but both Viacom and AMC are in unusual positions: AMC is currently suing Dish for breach of contract after Dish dropped another bundled channel, VOOM HD, and the suit is widely considered to be a layup for AMC (the judge on the case—not the lawyer for the prosecution, the judge—told the jury that Dish had destroyed evidence). AMC contends that the WeTV issue is a fig leaf for retaliation over the lawsuit. Viacom is trying to push EPIX in a critical stage of its growth, but the $500 million asking price (according to DirecTV) appears to have been a bridge too far according to the MSO, even as Viacom made rate concessions.

Ultimately, DirecTV has the option to put the network on its packages, which it might do if EPIX fares well elsewhere, but Viacom won't get the big multimiliion viewer (and dollar) boost it would have landed if DirecTV had ended up paying outright to carry the channel.

 

3) Retransmission consent. This is, obviously, the heart of the TWC/Hearst dispute, but it figures in other negotiations as well. Briefly, cable operators used to get a very cheap or even free signal from broadcasters (ABC, NBC, CBS, FOX) so that viewers didn't have to turn off their cable boxes to get the major over-the-air networks. Since the big switchover to an all-digital signal a few years ago, however, it's harder for viewers to get signals over the air, especially in urban areas, and most viewers have been watching broadcast networks exclusively on cable. Cable networks, meanwhile, are steadily on the rise, and fewer people are watching those broadcast networks than used to, though they still usually maintain a lead over cable. So broadcasters are suddenly charging more—sometimes a lot more—for a signal that used to be very cheap.

MSO's aren't happy about that, and it's costing them their margins, since they don't want to drive subscribers away by charging more than the market will bear—especially with several other options available to anyone who gets sick of seeing his or her cable bill go up. The price of retransmitted broadcast signals to cable operators is expected to balloon from $124.2 million in 2011 to $1.25 billion in 2015, according to a recent SNL Kagan study.

Many of the companies asking for higher retrans fees also own cable networks, so those negotiations are ever more strained, but even cable networks without a broadcast component find themselves up against MSO's driving harder and harder bargains (and, as with bundling, asking the government to intervene), as they deal with ballooning costs for big channels they have to have, but aren't used to paying for.

 

And there you have it. Ill will over streaming content + an end to the ceasefire over bundling + the ever-present retrans = one of the most toxic negotiating environments for carriage deals in recent memory. MSOs have begun to seriously weigh the costs of not carrying whole suites of networks—at least that's what the AMC/Dish Network showdown suggests. Unfortunately for them, any cutbacks in first-run content puts MSOs on a par with streaming services that are constructed piecemeal out of shaky licensing deals. The more of these disagreements there are, the more viewers are going to get fed up and switch over the online-only viewing or a streaming service that has a few shows they like. And that's not good for networks, either, since most streaming services offer content free of valuable advertisements.

There's a very real danger, as Jon Stewart rightly observed, that television viewers could rediscover the power of human intimacy, which, obviously, no one wants.