Liberty Sues Comcast Over DMX

Comcast Corp. is embroiled in a lawsuit with yet another programmer owned by Liberty Media Corp.

The programmer: TV-music provider DMX Inc., which is paid more than $18 million a year through an apparent sweetheart deal with AT&T Broadband, the MSO Comcast acquired late last year.

Comcast has balked at the so-called "contribution agreement" between DMX parent Liberty Digital Inc. and AT&T Broadband, with its 20-year term. The Philadelphia-based mega-MSO inherited the contract when it acquired the Broadband systems.

Breach claim

So Liberty Digital, the 56 percent owner of digital-music service DMX, is suing Comcast for breach of contract.

DMX has 10 million subscribers, according to its Web site. It is carried by EchoStar Communications Corp., which has 6 million direct-broadcast satellite homes.

The pending litigation is very similar to Comcast's dispute with Starz Encore Group LLC, as are the issues it raises.

Six years ago, Liberty Digital and Starz Encore — both part of John Malone's Liberty Media — were both awarded very lucrative long-term contracts with Tele-Communications Inc., predecessor to AT&T Broadband. Liberty Media was once a unit of TCI.

According to Comcast's recently filed 10-K annual report, Liberty Digital on Jan. 8 filed a complaint in a Colorado court against Comcast and AT&T Broadband. The suit claims a breach of the 1997 DMX contribution agreement between AT&T and Liberty Digital. Comcast filed an answer to the suit March 5, denying Liberty Digital's claims and mounting a defense.

Officials at Liberty, DMX and Comcast all declined to comment last week. After its purchase of AT&T Broadband, though, Comcast has said it will aggressively seek to cut programming costs, in part by cherry-picking the most favorable carriage deals from its own pacts and those secured by AT&T, and by obtaining greater volume discounts from programmers.

Under the "contribution agreement" in dispute, AT&T Broadband has to pay Liberty Digital fees for DMX, initially $18 million a year, but adjusted annually to reflect increases in the Consumer Price Index. Under those terms, the annual payment increased to roughly $20 million at the end of 2000, according to Comcast's 10-K filing. The lengthy pact extends until 2017.

That contribution agreement stemmed from Liberty Digital's purchase of DMX. As part of the sale, DMX stockholders received Liberty Digital shares and the right to require AT&T Broadband to purchase those shares, if certain conditions were satisfied.

In addition, AT&T Broadband agreed to pay Liberty Digital fees from sales of the DMX service to its subscribers. That pact later was amended to set "a fixed amount" in terms of the DMX revenue being paid to Liberty, according to a recent Liberty 10-K.

Stopped paying

In its suit, Liberty Digital claims that Comcast is bound by AT&T's "obligation agreement," yet stopped making payments in November last year.

Unlike AT&T Broadband, Comcast's systems carry the Music Choice digital-music service. Comcast owns a piece of Music Choice, as do Adelphia Communications Corp., Cox Communications, Time Warner Cable, Motorola Corp., Sony Corp., Microsoft Corp. and EMI Music.

In addition to Liberty Digital, Comcast has been engaged in contract disputes with Liberty's Starz Encore and billing vendor CSG Systems Inc.

Last November, Comcast filed suit against Starz Encore, claiming it should not be bound by a pricey 25-year carriage deal that AT&T Broadband inherited from TCI. Starz Encore has its own suit, filed in July 2001, pending against AT&T Broadband over that same carriage agreement.

Salomon Smith Barney analyst Niraj Gupta estimated that the Liberty Digital and CSG disputes would add up to $70 million in annual additional costs for Comcast, expenses greater than those for which the MSO believes it is responsible.

"With 21 million homes, Comcast is doing what it can do to be sure it has better economics going forward for content going over its pipe," Gupta said in an interview.