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The Next Chapter?

Programmers are anxious to see how Adelphia Communications Corp. will use the leverage it gains from bankruptcy proceedings that give the MSO the right to scrap existing contracts with its creditors — including carriage deals with networks.

A few cable-network officials said they fear Adelphia, the sixth-biggest U.S. MSO, will threaten to "reject" existing affiliation agreements — and drop networks — if it can't obtain renegotiated contracts with better terms.

But other programmers questioned how much of an edge Chapter 11 bankruptcy protection really gives the Coudersport, Pa.-based operator.

"Are they going to try to get their programming costs down?" said one network official. "Of course they are. Will they use the bankruptcy to their advantage? If they can.

"But they need to run the business. They need to have strong positive relationships in the industry in order to do that."

In general, cable operators are on the warpath over increased programming costs — as typified last week by ESPN's formal announcement of an annual 20% rate hike — and have not been shy about exploiting opportunities to rework contracts.

Comcast Corp. and Mediacom Communications Corp., for example, have leveraged their acquisitions of AT&T Broadband systems to try to improve the terms of their deals with programmers.

Cox Communications Inc. and others have also been vocal critics of spiraling programming costs.

Talks confirmed

Adelphia has held preliminary talks with some programmers about reworking contracts, sources said. An MSO spokesman confirmed there have been "general negotiations" with some networks.

Last week, Adelphia officials maintained that they have not yet determined how the company will handle its existing carriage agreements as part of the Chapter 11 filing.

"We haven't gone through any kind of rejection process with any programmer at this point in time," said Adelphia vice president of programming Jeff Abbas. "We really need to develop an aggregate strategy with a timeline of getting us out of [reorganization], but we haven't sat down and done it yet."

Despite Abbas's remarks, Adelphia has indicated that it has no intention of "assuming" any of its carriage deals with programmers, at least one source said.

That's because if a company that has petitioned for bankruptcy protection, like Adelphia, "assumes" an existing contract, it then must ante up all the pre-petition money [or funds owed prior to the bankruptcy filing] that it owes that particular supplier, according to several sources.

"To assume the contracts, they've got to cure defaults," said Jack Partain, head of the bankruptcy department at law firm Fulbright & Jaworski in San Antonio. "And defaults mean the payment obligations that are outstanding."

$200m past due

In Adelphia's case, that means the MSO would have to pay a lot of cable networks a lot of money. Last year, Adelphia's list of top 50 unsecured creditors included a batch of cable networks, including most of the major programming giants.

At that time, Adelphia owed that group nearly $200 million, mostly in overdue license fees. Home Box Office was owed the most, $34.4 million.

Adelphia at one point had 90 days to decide whether to reject or assume its contracts with suppliers, according to one source. But that deadline had been delayed many times until the MSO brought on its new management team — namely chairman and CEO William Schleyer and president and chief operating officer Ron Cooper, according to the source.

Adelphia also just recently hired Susan Judith Meyka as senior vice president of programming.

To date, Abbas said no carriage agreements had been rejected.

"As far as the bankruptcy issues go, we have a responsibility to everybody to work through our assumption-rejection strategy, and that's a work in progress," he said.

"We finally got our permanent management team in place here, so I envision we're going to have those conversations in the near-term," Abbas added. "It wasn't really a productive use of time when we were trying to plug holes in the bottom of the boat here. Now, we'll be getting at the kinds of questions we have to resolve to get this under reorg."

At this early stage, several programmers are already in talks with Adelphia about rejiggering affiliation contracts.

'Tweaking' going on

There is the opportunity to give Adelphia better license fees for core services, for example, in exchange for the launch of new services or for long-term contracts with the major networks, according to one network source.

"They're looking to tweak our contracts here and there," said another programmer source.

In contrast, Adelphia is looking to make wholesale changes in carriage deals involving retransmission consent, according to that source.

Some programmers maintain that Adelphia will only have a small advantage because of the bankruptcy and its option of rejecting existing contracts with vendors.

"It's a piece of leverage they perhaps have, but at the same time, how can they ever emerge from bankruptcy if they don't have the programming?" one programmer source said.

Another cable-network officials suggested that sometimes companies say they're going to reject a contract in an attempt to get that creditor to renegotiate the pre-petition obligations it's seeking from a company under Chapter 11.

"Do I expect there to be all sorts of interesting negotiations that go on as we move forward?" the official said. "Sure. That's one of the advantages of the bankruptcy code. It allows people to restructure so they can come out and be healthy."

Who's at risk

The networks that will be most vulnerable to pressure from Adelphia, according to several programming officials, are standalone services and weaker spin-off networks of major programming groups.

So far, Abbas claimed that Adelphia hasn't dropped any networks, but has "done some very mild repositionings." He didn't elaborate.

One cable-network official said he expected Adelphia to look to move some services from analog basic to digital tiers.

"They need to find capacity," he said. "They need to figure out a digital strategy. There will be people that get moved in that process.

"The bankruptcy code does give them a little more flexibility than they would otherwise have had in the middle of the term of an agreement."

If Adelphia does reject contracts, programmers could then seek "rejection damages" from the MSO in addition to the money they are owed, Partain said. In bankruptcy, contract assumptions and rejections are subject to the scrutiny of the court, which is usually lenient in terms of allowing rejections to go forward, he added.