Comcast Puts Squeeze On Programming Fees

After Comcast acquired AT&T Broadband to become the nation's largest cable-system operator, cable networks knew that the MSO would be looking to migrate to AT&T's generally superior license-fee deals. But, to the dismay of the programmers, Comcast is indicating that it wants better rates than even AT&T was getting, as much as 10% better.

Comcast executives are telling network executives that they don't necessarily expect large, sudden reductions. But, if networks are planning rate cards with the usual 6%-8% annual increases for their bigger customers, they should be thinking 2%-3% for Comcast. But some networks may indeed be asked for material reductions in short order.

The phrase Comcast executives are using is "MFN minus 10%." Large MSOs commonly have "most-favored-nation" clauses in their contracts guaranteeing them the lowest possible rates. So, if DirecTV or Cox negotiates a better rate, another distributor would automatically get that rate or some set percentage close to it.

Now that Comcast serves 25% of all the customers of MTV, CNN and ESPN—especially the ultra-expensive ESPN—company executives believe that they should receive greater volume discounts, just as Wal-Mart does from its countless suppliers.

"They're extremely aggressive, and it's going to be a bloodbath," said an executive with one network group. "They're going to drop channels to get this."

Comcast executives say they're not looking to provoke big fights. "We're not out to destroy anyone's business plan," said one executive, who wouldn't go into detail about company talks with networks. "But we are looking to slow down what has been an endless cycle of programming increases."

It's no mistake that, the day Comcast closed on the AT&T deal, the MSO went to court to break AT&T's hugely expensive deal with pay network Starz!. Programmers see that as a sign of things to come.

Programming executives say Walt Disney Co. is Comcast's biggest target. Disney owns ESPN, the cable network that operators hate most because of its high rates, which approach $2 per subscriber. The various flavors of ESPN plus The Disney Channel and ABC Family comprise about 20% of Comcast's total programming costs.

But the companies don't get along. Even though they're partners with Disney in E!, Roberts and Comcast Cable President Steve Burke—a former Disney executive—do not hide from associates a distaste for Disney and its executives. Two years ago, Disney waged a public campaign against Comcast, threatening to yank its ABC broadcast stations from Comcast systems if Roberts didn't submit to its terms for The Disney Channel. Disney executives would not comment.

"They are smart and tough businessmen, which is not a change from where they were before their incremental leap in size," said Court TV President Henry Schleiff of the Comcast leaders. But he added that he has had good relations with the system operator and doesn't expect that to change. "What hasn't changed is that these guys have always seen the future. They don't want to get out there in the first six months, 12 months and be seen as abusive."

Comcast is starting by cherry-picking contracts with networks, seeing which of AT&T's deals it wants to apply to Comcast's systems, which of Comcast's existing deals to apply to the AT&T systems. Network executives said that, whereas AT&T generally had greater volume discounts, some of Comcast deals have lower rollout commitments or allow the network to put channels on digital tiers more readily.

But new programming chief Matt Bond is also looking for something else: lies. Generally, AT&T had the most favored of most-favored-nation clauses. As the biggest operator, it negotiated the best rates. The head of affiliate sales for one cable-network group said that, in comparing contracts, Bond is finding that a few networks had secretly given Comcast a better deal without then lowering AT&T's price as required.

And he'll know the AT&T deals intimately. Before a brief stint at Yankees Entertainment & Sports, Bond was executive vice president of programming for AT&T Broadband and negotiated those very contracts.

"The low-hanging fruit are the programmers that have lied to them," the cable-network executive said.

In general, however, network executives are gratified that Bond replaced Comcast Senior Vice President Tom Hurley, because they find him easier to do business with. "Everyone seems to believe Matt Bond will have a moderating effect," said one programming executive. Bond did not return a call seeking comment.

Programming costs are major headaches for every operator. The $15 billion a year operators pay cable networks has grown around 10% a year. The increases are spurring operators to increase their own rates to customers 5%-6% this year, in turn drawing protests from subscribers and some Congressmen.

But it's a special problem for Comcast. CEO Brian Roberts has justified his $57.4 billion takeover of AT&T Broadband by promising Wall Street he could dramatically improve AT&T's woeful 21% profit margins within three years. That means squeezing an extra $1.2 billion in annual cash flow out of the operation to get the AT&T properties up to 35%.

A lot of that will come from cutting costs. Analysts expect $300 million in immediate savings this year from reducing AT&T's bloated corporate and divisional overhead.

But any operator's single biggest operating expense is programming costs, so that's where Comcast will turn.

Media analyst Richard Bilotti estimates that Comcast and AT&T Broadband combined paid programmers $3.9 billion last year, about 28% of their $13.7 billion in video revenue for the year. Of the $52.75 the average subscriber paid for basic, pay and digital networks last year, $14.87 of that went to programmers.