Broadband Cable Association of Pennsylvania

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March 1, 2013

What happens when the "bundle" begins to unravel?

The question is taking on intense importance for the cable-TV business, which for decades has forced customers to subscribe to groups, or bundles, of channels-whether they wanted them or not. Attacks on the bundle approach have escalated, most recently with Cablevision Systems Corp.'s lawsuit this week against Viacom Inc., accusing it of antitrust violations for forcing it to carry and pay for more than a dozen "lesser-watched" channels in order to offer the popular ones like Nickelodeon and MTV. Viacom disputes the allegation. Now pay-TV executives-as well as its customers-are openly pondering a world where the bundle no longer reigns, even though such a scenario could be years away. "People should be able to build what they want and get what they want," said Bartees Cox, a spokesman for consumer group Public Knowledge. "Without the 'take it or leave it' requirements of bundled programming packages at a wholesale level, cable companies could tailor smaller and lower-priced packages that could offer flexibility and have great appeal to specific interests and audiences," said Charlie Schueler, spokesman for Cablevision.

Giving consumers the right to pick and choose could be costly for the big entertainment companies such as Time Warner Inc., Viacom, News Corp. and Walt Disney Co., which rely on subscription fees from cable channels for a big chunk of their profits. Disney draws more than $10 billion in such fee revenue, mostly from its majority-owned ESPN group of channels, according to estimates from market researcher SNL Kagan. That is about a third of the $31.6 billion expected to be generated industrywide by such fees this year, excluding premium services like HBO and broadcast outlets, Kagan says. The size of these fees varies widely. ESPN gets $5.54 per subscriber a month, while Viacom's MTV gets 41 cents per subscriber. Niche channels get much less. MTV Hits, for instance, gets two cents, according to Kagan.

There are already some cheaper packages in the market-but they aren't promoted heavily. Verizon Communications' FiOS service recently introduced "Select HD," priced at $49.99 a month, about $15 below the next-level package. Like similar offerings available from other distributors, it excludes sports channels such as ESPN. But operators can't market these too widely for fear of violating contracts with entertainment companies. Those contracts typically require that their channels reach 80% to 90% of their subscribers. While some pay-TV executives say that full "a la carte'" could be overwhelming for viewers, others say that such an offering would be "the dream" but not practical, considering the reality of relationships with entertainment companies.

Instead, several pay-TV executives suggest creation of smaller bundles or tiers based on genre, from which viewers could pick and choose. For instance, a general entertainment package could include Time Warner's TBS and Comcast Corp.'s USA. Atop that package or standalone, subscribers could choose a sports bundle including channels like ESPN and regional sports networks. A news package might offer Time Warner's CNN, News Corp.'s Fox News, Comcast's MSNBC and Bloomberg TV, among others. A family and kids tier might include Nickelodeon and the Disney Channel. Allowing people to drop sports channels, in particular, could help them save money because sports channels are among the priciest. ESPN is the single most expensive channel by far. But if lots of people drop it, customers who want it would have to pay more. There are some other expensive channels as well, including News Corp.'s Fox News (94 cents a month) and Time Warner's TNT ($1.24 a month), according to Kagan estimates. News Corp. also owns The Wall Street Journal.

Mediacom Communications Corp., a small cable operator based in Middletown, N.Y., has long agitated for unbundling. It advocates a "hybrid a la carte" model, in which those most expensive channels are sold individually on top of genre-based tiers. Only a handful of channels from each media conglomerate are "priced really exorbitantly," said Thomas Larsen, group vice president of legal and public affairs at Mediacom. Under the hybrid model, distributors would take out of the equation the channels "causing the prices of packages to go up so high." Mr. Larsen, along with DirecTV's top programming negotiator, Dan York, also said broadcast networks, which until recently didn't get paid any money by pay-TV distributors, may also have to be sold individually because of the big fees they are now seeking. An executive at one distributor said his company is already in discussions with broadcast station groups to offer networks a la carte to customers.

There has long been intense debate about whether unbundling would save consumers money. Two studies by the Federal Communications Commission in the past decade came to opposite conclusions. A Temple University study, meanwhile, concluded only incremental savings for consumers, and that was before accounting for the higher costs for customer service and programming that distributors would likely pass along. Big media companies also argue that a la carte would be bad for the consumer in the long run. "A la carte-maybe a little counterintuitively-raises prices and reduces choice because it increases the costs," said Mike Fricklas, general counsel at Viacom, explaining that "now you have to worry about whether they are subscribing and watching." He said a lot of money would be siphoned out of programming investment and into marketing dollars because there wouldn't be assured distribution.

Executives at media companies say they would be forced to raise prices on their channels to maintain how much they spend on sports rights, original programming and other content. Mr. Fricklas says the conversation will change only if "cutting the cord" becomes a widespread reality. "As of right now," Mr. Fricklas said, "the cable packages are expensive to some people but not so expensive that people aren't choosing to subscribe." But another pay-TV executive said improved Internet distribution of video will "force the change." Wall Street Journal


A federal jury in Manhattan ordered ESPN Inc. to pay Dish Network Corp. $4.86 million in damages in a dispute over licensing rates for sports broadcasts. Dish Network alleged that the sports broadcaster violated an eight-year broadcast licensing agreement by offering more favorable rates to the satellite provider's competitors. The agreement is set to expire later this year.

The case is the latest in series of disputes between cable and satellite providers and television networks over rising licensing costs, which have sometimes resulted in blackouts on programming. The jury on Thursday found in favor of Dish Network on only one of its four claims: that ESPN had allowed Dish's competitors to pay a lower rate for ESPN Deportes, the broadcaster's Spanish-language channel. Dish Network had sought more than $152 million in the dispute. Diane Sullivan, a lawyer with Weil, Gotshal & Manges LLP, which represented ESPN, said the network was "thrilled with the result." She said the network was evaluating whether to file a post-trial motion asking the judge to set aside the jury's verdict on the one claim where Dish prevailed. ESPN is majority-owned by Walt Disney Co. Stanton Dodge, Dish's general counsel, said: "To deliver the best programming at the best value to our customers, Dish will remain vigilant in our efforts to ensure that programmers honor their contractual commitments."

In its lawsuit, Dish Network claimed that the sports broadcaster offered lower licensing rates for ESPN Deportes competitors in violation of a so-called most-favored nation provision in the pact. The provision entitles Dish to receive the same rates and cable packaging options as competitors, the satellite provider claimed. The satellite provider also claimed ESPN allowed another competitor to offer online steaming broadcasts of its programming without charging an additional fee and offered Dish Network competitors a better deal when it came to cable packaging placement for ESPN Classic, which rebroadcasts classic sporting events. The jury didn't find ESPN liable on Dish Network's claims regarding ESPN Classic and Internet streaming. ESPN claimed that Dish used the most-favored nation provision inappropriately to try to force the network to renegotiate the deal. Wall Street Journal


Cablevision Systems Corp., cable company for the New York area, posted higher fourth-quarter earnings on Thursday thanks to a lawsuit settlement, but its revenue slipped, hurt by Superstorm Sandy. "The enormous challenges of Superstorm Sandy had a strong negative impact on our fourth quarter results," said James Dolan, president and CEO, in a statement. The damage resulted in credits to customers who lost service. Cablevision earned $116.5 million, or 45 cents per share, in the October-December period. That's up from $60.6 million, or 22 cents per share, in the same period a year earlier. The latest quarter's results included a gain of 78 cents per share from a lawsuit settlement with Dish Network. Revenue slipped 2 percent to $1.66 billion from $1.69 billion. Analysts, on average, were expecting revenue of $1.7 billion, according to a poll by FactSet.

Cablevision had 3.6 million total customers at the end of December, down by 39,000 from the end of September. This included a loss of about 11,000 customers located in areas most affected by Sandy, the company said. For the year, its net income fell to $233.5 million, or 87 cents per share, from $291.9 million, or $1.02 per share, a year ago. Annual revenue was almost steady at $6.7 billion. The company's shares fell $1.50, or 9.7 percent, to $13.97 in midday trading Thursday. The stock has traded in the 52-week range of $10.76 and $18.86. New York Post


Political commentators Terry Madonna and Michael Young think it would be to the party's advantage if it hopes to unseat incumbent Gov. Tom Corbett, a Republican. They argue in their latest "Politically Uncorrected" column that the Democrats have a "nobody problem," meaning not enough people know what they call an "impressive" field of potential candidates statewide. One way to generate name recognition, they say, is through "a good old-fashioned party primary, one that will give their candidates a chance to offer their vision for Pennsylvania, while giving those voters a chance to size up the candidates." But they acknowledge a primary battle is not a popular view. "It's widely believed that contested primaries usually waste limited campaign resources, gratuitously offer general election opponents juicy targets and turn off voters," they wrote.

How many of the potential Democratic candidates do you know? The analysts say they include former state Department of Environmental Protection Secretary John Hanger; Philly businessman Tom Knox; state Treasurer Rob McCord; Allentown Mayor Ed Pawlowski; Congresswoman Allyson Schwartz; former Congressman Joe Sestak; state Sen. Mike Stack; and former Revenue Secretary and businessman Tom Wolfe. One name that won't be on the list is former Congresswoman Kathy Dahlkemper, of Erie, who has decided to run for Erie County executive this year. Erie Times-News

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