Broadband Cable Association of Pennsylvania


February 27, 2013

Long-simmering tensions within the television industry over how TV channels are packaged and priced boiled over on Tuesday, when Cablevision Systems Corp. sued MTV's owner Viacom Inc., alleging antitrust violations.

Cablevision, a pay-TV distributor with a high profile in the New York area, alleged Viacom forced it to carry and pay for more than a dozen "lesser-watched" channels such as "Palladia, MTV Hits and VH1 Classic" for the right to carry its popular networks such as Nickelodeon, MTV and Comedy Central. The suit pits two of the television industry's best-known moguls against each other. Cablevision is controlled by 86-year-old Charles Dolan and his family, while Viacom is controlled by 89-year-old Sumner Redstone, whose empire also includes CBS Corp.

In the suit, filed under seal in federal court in Manhattan, Cablevision asks the court to void a carriage agreement negotiated with Viacom at the end of last year. Cablevision alleged that Viacom had "coerced" it "by threatening to impose massive financial penalties unless Cablevision complied with Viacom's demands." Viacom said it would "vigorously defend this transparent attempt by Cablevision to use the courts to renegotiate our existing two month old agreement." It said that Viacom, like other programmers, has "long offered discounts to those who agree to provide additional network distribution," adding that "these arrangements have been upheld by a number of federal courts and on appeal." The suit goes to the heart of a longstanding complaint from cable and satellite operators about entertainment companies' practice of bundling all their channels together in their agreements with distributors. The practice makes it hard for distributors to drop channels with small audiences, undercutting their ability to deal with rising programming fees. It is also the main reason why consumers can't pick and choose the channels they watch, and instead must select only among broad "tiers" of channels. Mr. Dolan has long been an advocate of "a la carte" offerings, where consumers have more choice about the channels they pay for.

The bundling practice is lucrative for big entertainment companies, including Walt Disney Co., Time Warner Inc. and Wall Street Journal owner News Corp. as well as Viacom. If Cablevision prevails in the suit, entertainment companies could find it much harder to sell big packages of cable channels, hurting their revenue as a result. "This is not just about Cablevision versus Viacom, it's likely about a broader impact, highlighting the issue for Washington and for upcoming programming negotiations," said one media investor. The issue has loomed larger amid rising concerns over customers being tempted to disconnect their pay TV, or "cut the cord"-a move that is more tempting with higher cable-TV rates, the weak economy and new video options such as Netflix Inc.

The average cost of pay TV per U.S. household is expected to rise to $73.44 this year, from $66.39 in 2010, estimates SNL Kagan, a market researcher. "Cablevision and all the rest of us are recognizing that as we approach $100 [a month] for what essentially is a basic cable service, that consumers aren't in a position to be able to afford that any longer," said Thomas Larsen, group vice president of legal and public affairs for Mediacom Communications Corp., a closely held pay-TV distributor. "Cable's hands have been tied to this specific bundle and that's the only way we can sell it to our customers." Media executives note that Cablevision last year was part of an industry group that took the opposite point of view about bundling. It was one of a number of big entertainment and distribution companies that successfully defended a suit filed by consumers that sought to compel the TV industry to allow the sale of cable channels separately. The lawsuit alleged that programmers exploited their market power and harmed competition by requiring distributors to sell channels in pre-packaged tiers. A cable executive said that case was "a completely different set of facts" and not related to the issue in this dispute.

In the Viacom case, media industry executives say Cablevision would have to prove that Viacom had a dominant channel and was using that channel to make consumers take less-desirable channels-something that would be hard, especially given the ratings declines Viacom has suffered. In its statement Tuesday, Cablevision referred to Viacom channels including Nickelodeon, MTV and Comedy Central as "must-have networks." While distributors can turn down certain channels, they can end up paying more if they do so. In this case, Viacom set the price for a group of its most-popular channels above that of a package that bundled the bigger channels with little-watched outlets, say multiple people familiar with the situation. A person familiar with Viacom's thinking said that larger bundles of channels cost less because Viacom gets value from advertising with the broader distribution. Entertainment executives have long argued that breaking up the bundling arrangement and letting viewers pick and choose channels wouldn't reduce costs.

Some cable executives concede that letting viewers pick whatever channels they want could be complicated for viewers. But they say more flexibility in shaping packages would be better. Pay-TV distributors have recently introduced smaller packages that cost less, excluding some pricey sports channels. But they tend not to market these offerings heavily for fear of violating contracts with entertainment companies.

Some cable operators, including Verizon Communications Inc. DirecTV and Cablevision have introduced surcharges to partially cover the cost of sports programming, a way of highlighting how sports costs are driving much of the increase in cable fees. Cablevision's suit drew statements of support from some other distributors and independent programmers. "Our customers have told us time and time again they don't want to pay for channels they don't watch," DirecTV said. Charter Communications said, "We applaud Cablevision's efforts to rein in programming costs. Chad Gutstein, chief operating officer of Ovation, a small arts channel that was dropped from Time Warner Cable Inc. at the start of the year, said that it is the "poster child" for the kind of programmer affected by the bundling practices of big media companies. "Wholesale bundling by larger programmers is a competitive barrier that we face every single day," he said. Others took a more nuanced stance. Cox Communications Inc. said while cable providers want flexibility with what channels are carried, "we have to balance that with getting the content our customers want as well. It's a balance that the whole industry is monitoring." Wall Street Journal

TiVo Inc.'s swung to a fiscal fourth-quarter loss as a settlement with AT&T Inc. boosted the digital-video-recorder company's year-ago results, though it continued to add subscribers in the latest period. Shares were up 2.3% to $12.70 after hours as the company also reported a lower churn rate.

For the current quarter, TiVo projected a net loss between $16 million to $19 million and service-and-technology revenue of $60 million to $62 million. The company expects to be profitable on an adjusted earnings before interest, taxes, depreciation and amortization basis, excluding litigation costs. Analysts polled by Thomson Reuters most recently predicted a loss of about $4.5 million and $67 million in comparable revenue. TiVo, which has mostly posted losses since the second half of 2009, has seen intellectual-property battles and heavy litigation costs impact its bottom-line results in recent periods. However, the company has also seen good returns for its legal spending, reaching settlements with like EchoStar Corp., Dish Network Corp. and Verizon Communications Inc. The year-ago period included $54.4 million of litigation proceeds from the AT&T settlement.

TiVo has also been placing less emphasis on set-top boxes it sells at retail and more on distributing its offerings through operators' set-top boxes or through TVs alone, helping to drive net subscription growth recently. The company has now recorded subscriber growth for six consecutive quarters, following a four-year streak of declining subscriber numbers. TiVo has noted that companies such as Comcast Corp. have expanded the markets offering TiVo boxes, giving it momentum to grow its business and prepare for new competitors. In the latest quarter, TiVo added a net 209,000 subscribers, compared with the 234,000 subscribers it gained a year earlier.

Chief Executive Tom Rogers said the company in the new fiscal year expects to continue to grow revenues related to its current deployment deals, continue subscription growth, and continue to efficiently manage research and development spending. For the period ended Jan. 31, TiVo reported a loss of $15.8 million, or 13 cents a share, compared with a year-earlier profit of $7.2 million, or six cents a share. Net revenue rose 34%, to $88.9 million, while service-and-technology revenue increased 31%, to $65.7 million. The company in November projected a net loss of $15 million to $17 million and service-and-technology revenue of $63 million to $65 million. Gross margin widened to 54.1% from 49.5%. Operating expenses nearly tripled, to $62.7 million, as the year-ago period benefited from litigation proceeds. Subscription acquisition costs slipped 2.6%. Monthly churn, or the customer cancellation rate, was 1.5% for TiVo-owned subscriptions, compared with 1.7% a year earlier. Through the close, the stock has climbed 22% over the past three months. Wall Street Journal