Broadband Cable Association of Pennsylvania

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August 6, 2013

Julie O'Malley has a message for Time Warner Cable and CBS. "Stop being greedy ... and stop holding customers hostage," the Los Angeles resident said after the signal for KCBS-TV Channel 2 went dark Friday. "What is wrong with you people?" O'Malley and more than 3 million people around the country are the collateral damage of a fight over money between two media giants.

Besides Los Angeles, where KCBS-TV and KCAL-TV Channel 9 are dark, CBS-owned stations in New York and Dallas also are no longer being carried by Time Warner Cable systems there. In addition, Time Warner Cable has blacked out the CBS-owned pay cable channel Showtime. Talks between the two companies over a new distribution deal have broken down, and a resolution in the immediate future seems unlikely. Some media analysts predict that the blackout could last several weeks.

The dispute is giving consumers a rare behind-the-scenes look at one of the more dysfunctional aspects of the entertainment industry - the relationship between programmers such as CBS and distributors such as Time Warner Cable. At issue are fees that CBS wants to charge Time Warner Cable to carry its local television stations. CBS is seeking a hefty increase in so-called retransmission consent fees, which Time Warner Cable is resisting. Although such financial disputes are common in the industry, they are usually resolved without subscribers losing channels. However, the gulf between CBS and Time Warner Cable is so wide that the signals came down, and now both sides are fighting it out in public.

Time Warner Cable says in ads on TV, radio and print that it is willing to pay more - but not as much as CBS is seeking. CBS is countering in its own ads that its ratings and popularity are worth more than what Time Warner Cable is paying. The complexities of the situation can make it difficult for subscribers to know where to direct their anger. "It is like the healthcare industry - you get this enormous bill and you can't tell who is the bad guy," said Susan Crawford, a professor at the Benjamin N. Cardozo School of Law in New York. "The consumer is squeezed between these giants, no question."

Time Warner Cable Chief Operating Officer Robert Marcus put the blame on programming costs, which are "growing at a rate that is not sustainable." In an interview, Marcus said the cable company "couldn't be more anxious to get CBS programming back on the air," but said, "we can't accede to every demand they make." CBS has argued that it should be paid the same or more than Time Warner Cable pays for cable networks such as TNT or ESPN, which typically have smaller audiences. "What CBS seeks, and what we always have sought from the beginning, is fair compensation for the most-watched television network with the most popular content in the world," the network said in a statement.

Although anyone with an antenna can get CBS, NBC, Fox or ABC for free over the air, the majority of homes now get their television content from a cable, satellite or telephone company, which charge to receive those signals. Broadcasters were given the right to cash in on that as part of the 1992 Cable Act, which allowed them to negotiate so-called retransmission consent fees from pay TV distributors. For many years, rather than charge retransmission consent fees, broadcasters used that leverage to get into the cable business. Fox and NBC launched FX and MSNBC, respectively. But there is little space for new channels these days. Broadcasters instead want cash to help cover their own rising programming bills - particularly for sports - because revenue from advertising alone is no longer enough. "It is clear that the broadcast business needs a dual revenue stream, from both advertising and subscriptions, to be viable," 21st Century Fox President Chase Carey said this year.

Neither CBS nor Time Warner Cable will discuss the specifics of the negotiations. Media analysts and industry insiders have speculated that CBS is seeking a long-term deal with Time Warner Cable that would ultimately increase the monthly fee it gets from less than $1 a subscriber to about $2. "It would seem like a bargain," said David Bank, an analyst with RBC Capital Markets, who noted that CBS invests four to eight times more in programming than a typical cable network and has an audience that is five times greater. ESPN is the most expensive cable network, costing almost $6 a subscriber, according to industry consulting firm SNL Kagan. TNT, Disney Channel and the NFL Network all get more than $1 a subscriber. Fox News is also in the $1 range.

But Time Warner Cable's Marcus doesn't think comparing what CBS gets with what many cable networks get is fair. "You can't lose track of the fact that broadcast content is available free over the air," Marcus said. "When you can get something for free, it doesn't merit the same level of value as something you can only get by subscribing." The effect of the blackout on CBS' bottom line won't become clear for several weeks. Its television stations will probably feel more pain than the broadcast network because a ratings decline will have a greater effect on the local level.

Unless the blackout runs into the upcoming football season, it seems unlikely that Time Warner Cable could lose subscribers. For now, lawmakers and regulators are staying on the sidelines. But if the signals stay off for several weeks, there could be calls for a government solution. The cable industry has been aggressively lobbying Capitol Hill to revisit the retransmission consent rules and to make it harder for blackouts to occur. Crawford is skeptical that Congress can have a meaningful role in this or other distribution battles. "This is likely something that Congress would put on the 'too-hard' pile," she said. Los Angeles Times; see TWC CEO Glenn Britt's letter to CBS CEO Les Moonves

Dish Network Corp. swung to a second-quarter loss as the company was hit by large impairment charges, while pay-TV subscriber additions slowed. Former unit EchoStar Corp. also swung to a loss. Dish has struggled to combat subscriber losses amid a maturing U.S. subscription-television market and the growing popularity of online entertainment. The company launched a Blockbuster-branded streaming service last year and has attempted to attract more affluent customers who are less likely to cancel their service. Investors are also focused on prospects for Dish's spectrum, which has grown more valuable as the race by wireless carriers to snap up limited airwaves accelerates.

Wednesday, Dish reported a loss of $11 million, or two cents a share, compared with a profit of $226 million, or 50 cents a share, a year earlier. The latest period included $438 million of impairment charges tied to two acquired satellites. Revenue edged up 1.1% to $3.61 billion. Analysts polled by Thomson Reuters had most recently forecast revenue of $3.65 billion. Dish added about 624,000 pay-TV subscribers, compared with 665,000 additions a year ago. The company ended the quarter with a customer base of 14.01 million pay-TV subscribers, down slightly from a year ago. The pay-TV average-monthly-subscriber turnover rate, or churn, was up at 1.67% from 1.6% a year earlier.

The company also added about 61,000 net broadband subscribers in the second quarter, versus additions of 11,000 in the year-earlier quarter. Its broadband subscriber base jumped 24% from the first quarter to 310,000. Meanwhile, EchoStar-the maker of set-top boxes that was spun off from Dish at the beginning of 2008-posted a loss of $9.8 million, or 11 cents a share, compared with a profit of $35.7 million, or 41 cents a share, a year earlier. Revenue rose 3% to $830 million. In June, Dish said it had withdrawn its offer for Clearwire Corp., after a rival bid from Sprint Nextel Corp. won support from Clearwire shareholders, ending the satellite TV firm's months-long pursuit of Clearwire. Earlier that month, Dish ended its effort to buy Sprint, whose shareholders have since approved selling control of the carrier to Japan's SoftBank Corp. in a roughly $21.6 billion deal. Wall Street Journal

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