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Distributor Dilemma: Pay More, or Lose Subs

Satellite-TV provider Dish Network is the latest in a growing group of distributors that have decided to risk going dark with a major programmer rather than absorb what they call unwarranted price increases.

The content providers involved in most of the recent disputes have networks owned by Viacom, the parent of MTV Networks, and Time Warner Inc.- owned Turner Broadcasting System.

It might just be a case of timing or coincidence that those programmers have been involved. But some analysts believe there might be more trouble ahead for those particular channels, and others like them.

In the latest spat, seven Turner networks went dark to 14 million Dish Network subscribers on Oct. 20 — CNN, CNN en Español, truTV, Boomerang, HLN, Cartoon Network and Turner Classic Movies — after the satellite-TV provider said it would not agree to what it called unreasonable financial demands.

GETTING PRICIER

The blackout does not initially include Turner’s top two networks, TNT and TBS, but sources familiar with the situation said carriage agreements for those channels expire before the end of the year.

This is the second time in about a year these Turner channels were the subject of a blackout. They were off Cable One systems for about three weeks last October before a deal was reached. As for Viacom, since April, MTV, Comedy Central, Nickelodeon and more than a dozen of its other services have been off the TV lineups of more than 1 million customers of Cable One and Suddenlink Communications.

Phoenix-based Cable One had about 525,000 video customers at the time it failed to reach a carriage agreement on April 1. Suddenlink, which has about 1.1 million video customers, let its carriage agreement with Viacom expire on Oct. 1, claiming the programmer demanded rate increases of nearly 30% for some of its channels.

Pivotal Research Group principal and senior media and communications analyst Jeff Wlodarczak said he believes Viacom and Turner might be most at risk because they receive large fees.

Turner’s TNT charges about $1.44 per month per subscriber, according to SNL Kagan, second only to ESPN. Distributors also have concluded, in some cases, that there are ready replacements for much of their content.

That replacement scenario clearly is being played out in battles with Viacom. Both Cable One and Suddenlink reached deals with music-focused network Revolt TV, millennial- oriented Pivot and preschooler channel Sprout as topical substitutes for Viacom’s MTV, VH1 and Nickelodeon.

Distributors can replace a programmer with something cheaper, in the same genre, but they walk a fine line when switching out popular networks for less-watched ones.

As Peter Felton, a Suddenlink customer in West Virginia, posted to Twitter: “Replacing Nickelodeon with Sprout is like pretending that Shasta Cola is as good as Coke.”

Viacom executive vice president of content and distribution Denise Denson was also skeptical of the strategy.

“It’s all part of their negotiation plan to get a better deal,” she said. “I don’t think it’s working for them, I think just like we saw with Cable One, they are going to lose more subscribers, and take a bigger financial hit than the deal would have ever cost them.”

Carriage fights hurt all parties involved, from the networks that lose access to affiliate fees and advertising revenue to the distributors that risk losing subscribers to other pay TV providers.

In the second quarter, Cable One more than doubled its video-customer losses, to 34,000 from about 14,000 in the prior year, almost all due to the loss of popular content.

“Clearly they are willing to lose subs,” RBC Capital Markets media analyst David Bank said. “I don’t think that is going to be the business plan of the average large MVPD, especially a publicly traded one.”

Viacom’s carriage deal with Suddenlink expired about three weeks ago, so the impact on subscribership won’t be officially known until the company reports its third-quarter results on Nov. 7. But it is likely that there will be at least some increase in disconnects in the period.

Suddenlink declined to comment but sources familiar with the company said they don’t expect the Viacom dispute to have a material impact. Nevertheless, overbuilders and satellite companies have been stepping up their marketing efforts in some of its territories.

In Parkersburg, W. Va., CAS Cable is promoting a $65-per-month double play video and Internet package to Suddenlink subscribers. In Alexandria, La., Jeremy Cleary, owner of Dish Network and DirecTV retailer Get Wired, said his activation and sales volume has risen by about 200% in October. Cleary, who declined to say just how many subscribers that translated into, attributes the rise to Suddenlink’s Viacom dispute.

Cleary and others are working hard to drive the message home that they have programming Suddenlink doesn’t.

“We’re definitely pushing and promoting it,” Cleary said. “I think it’s just now gradually starting to sink into the public’s mindset that this is taking place.”

The Viacom and Turner (minus TNT and TBS) situations also point to what Bank said is the priority for distributors.

“If you look at what you’re missing [in the Viacom and Turner disputes], there’s nothing that’s really appointment driven right now,” Bank said. “That’s going to be key in the long-term future of the eco-system. You’re going to want to pay for events and what is crucial to watch today.”

Major sporting events like the World Series, Super Bowl and NBA Finals and awards shows like the Oscars and the Emmy Awards often prove to be a network’s biggest bargaining chip come renewal time, he added.

AMC, DISCOVERY EYED

Networks that don’t show those kinds of live events, such as AMC and Discovery, but are expected to significantly step up their affiliate fees in the next renewal cycle, could be at a disadvantage.

AMC has been at the lower end of the affiliate-fee spectrum, charging about 39 cents per subscriber per month, according to SNL Kagan, and officials have said it willpursue significant increases in its next contract talks.

Discovery Communications, with a stable of networks ranging from the Discovery Channel (42 cents) to Discovery Fit & Health, set to rebrand to Discoveery Life Channel in January (8 cents), also has said it will push to receive what it feels is a fair price for its networks.