How the Time Warner Cable, CBS Standoff Could Set the TV Standard

Alex Ben Block
The Hollywood Reporter
How the Time Warner Cable, CBS Standoff Could Set the TV Standard

While Time Warner Cable subscribers are watching closely a CBS standoff that is entering its fourth week, TV distributors should be monitoring the negotiations even more diligently because the ultimate settlement is likely to set the pattern for the entire industry.

Unlike other recent retransmission negotiations that focused on small fee increases, CBS is determined to make up for what it perceives to be a historic injustice in terms of what cable and satellite pay for their content.  It wants a leap from around 66 cents per subscriber per month to around $2, based on figures from SNL Kagan.

Content companies typically win these carriage fights, and this one likely won’t be different. As the fall season approaches, CBS’ leverage grows.

When cable and satellite distributors start losing customers, they have a history of caving in. If that happens this time -- probably on the eve of the NFL season -- you can bet that NBC, ABC and Fox will all be looking for the same kind of historic increase. And Time Warner Cable will be joined by Comcast, Cox, DirecTV and even Dish Network in facing this new reality.

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“Any time one of these larger networks sets the new standard in terms of pricing for their programming, the rest follow,” says Justin Nelson, analyst for SNL Kagan. “In most cases it’s been CBS and Fox trailblazing what the rates should be and then ABC and NBC following.”

Dish, on the distribution side, has been second only to TWC in trying to hold the line, and Dish faces the next big test with the ABC/Disney channels carriage -- including the big kahuna of retrans deals with ESPN. The current ABC/Disney contract with Dish expires around the third week of September.

In this current fight, both sides feel justified and righteous.

“In the past (CBS has) said there’s a big disconnect in terms of broadcast viewership and what cable affiliates are being paid from the operators,” says Nelson, adding: “In this case CBS is taking a kind of strong arm approach. They are saying we’re delivering a lot more in terms of programing and viewership, so we should be paid market rates.”

CBS likes to distinguish its content from that of cable channels like Time Warner’s TNT, which gets about $1.25 per subscriber but spends less on programming and sports rights.

“It’s perfectly reasonable for CBS to be getting considerably more retransmission money than TNT,” says Dennis Wharton, spokesman for the National Association of Broadcasters, which represents the broadcast networks. “CBS runs first-run programming and TNT essentially re-runs shows from CBS and other broadcasters much of the time.”

Time Warner Cable won’t comment but the company’s spokesperson has said the CBS demands are outrageous. In its view, CBS already has a financial buffer because it can use the free government-provided spectrum to reach audiences who don’t subscribe to cable. That is why, says TWC, CBS shouldn’t get as much as a dedicated cable channel.

TWC also is aware the industry is watching. A spokesperson said just before the blackout started Aug. 2: “We’re not the only ones -- everyone is having these problems. The truth is literally every other distributor, whether cable, satellite or Telco, has acknowledged the problems created by programmers’ rising costs.”

It’s hard to cry for either. Both CBS and TWC are hugely profitable, and the current fight is more about what might happen than what is happening. According to figures compiled by Kagan, in 2011, total broadcast retransmission fees were only about $1.76 billion while cable channels were paid around $27 billion in the same year.

There is ample reason to believe TWC itself has already accepted it will have to fork over a big increase. Negotiations are said to have stalled on other issues such as the value and use of digital rights. TWC under the old contract maintained video on demand rights but not TV Everywhere and other digital rights that have emerged since the last deal.

An Aug. 5 letter from TWC CEO Glenn Britt included an offer to let CBS channels (including Showtime, The Movie Channel and local channels in New York and Los Angeles) be sold ala carte – one at a time – but there was something else in there which is much more important. “In the interests of getting CBS back on our cable systems,” wrote Britt,” TWC will “reluctantly” agree to “the new economics” hammered out in the negotiations.

CBS dismissed the letter as a public relations stunt. But the message was clear -- in the end TWC will pay what it must even if it isn’t happy about it.

As negotiations have dragged on, interest groups have jumped on competing bandwagons.

 A bevy of “public interest” groups are pushing for a la cart pricing, though it’s not clear that would alleviate the high cost of cable and satellite. Plus, there is little political appetite to push proposed a la cart legislation through Congress. And there is a practical problem. All the current contracts between distributors and content owners essentially prohibit a switch to ala carte; so it would take years just to unravel the complications.

By the time the first pass is thrown in a regular-season NFL game, it is very likely the CBS-TWC brouhaha will be an unpleasant memory. But the lingering effect will continue to be felt in the profits of distributors and in customer bills.