Broadband Cable Association of Pennsylvania

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March 18, 2013

Verizon Communications Inc. is proposing to shake up the pay-television business based on a simple premise: it wants to tie the fees it pays to carry TV channels to how many people actually watch them. Verizon, whose FiOS TV is the nation's sixth-biggest pay-TV provider, with 4.7 million subscribers, has begun talks with several "midtier and smaller" media companies about paying for their channels based on audience size, according to Terry Denson, the phone company's chief programming negotiator. He declined to identify any of the media companies.

Under existing arrangements, distributors like cable and satellite operators pay a monthly, per-subscriber fee to carry channels based on the number of homes in which they agree to make the channels available, regardless of how many people watch those channels. "We are paying for a customer who never goes to the channel," Mr. Denson said.

Instead, Verizon would like to offer broad distribution of a "significant number of channels," including independent networks and smaller outlets. But each channel would be paid solely according to how many subscribers tuned in each month for a "unique view," or a minimum of five minutes, Mr. Denson said. Viewership would be measured by Verizon's set-top box data, not Nielsen ratings. "If you are willing to give a channel five minutes of your time, the cash register would ring in favor of the programmer," Mr. Denson said. For smaller and independent channels that often aren't widely distributed, he said, this model would provide much broader exposure. The proposal, if implemented, wouldn't reduce FiOS subscribers' cable bills, Mr. Denson said. But over time, he said, he hoped the shift would "stabilize retail prices for consumers," unless more people started watching smaller and midsize channels. If retail prices increase, "it would be due to consumer consumption," he said.

Mr. Denson said that for the companies with which he has negotiated so far, his plan has been a "head-scratching thing" because "it's such a disruptive model." Discussions are "inching forward," he said. The executive said he hasn't yet raised the idea with big media companies, which own most TV channels, but he planned to bring it up with them as contract renewals roll around. He acknowledged that it would be difficult to persuade the big companies to get on board and "just go cold turkey."

Verizon's proposal comes amid rising tensions between distributors and entertainment companies. With cheaper online-video outlets now offering a wide range of TV shows, several pay-TV executives have warned of the dangers that rising pay-TV costs could prompt consumers to disconnect. To deal with rising costs, some distributors, such as Time Warner Cable Inc., have warned they will cull small channels with low ratings from their lineups. Cablevision Systems Corp. recently sued Viacom Inc. alleging that its practice in negotiations with distributors of bundling popular channels with less-watched outlets violates antitrust laws. If broadly accepted, Verizon's proposal could have a far-reaching impact, potentially hurting revenue for some companies but improving others. Many channels owned by big media companies are available in nearly all the roughly 100 million households with pay TV, according to media researcher SNL Kagan. And while many of the most-popular channels earn the highest fees, big disparities exist, particularly for sports channels, which cable and satellite operators view as particularly valuable.

Last year, for example, Walt Disney Co.'s ESPN averaged one million viewers watching its programming live on any given day and up to seven days after broadcast. That was slightly less, according to Nielsen, than the 1.3 million who were watching USA Network, owned by Comcast Corp.'s NBCUniversal. Yet distributors like Verizon paid ESPN an average of $5.04 a month per household last year, according to SNL Kagan, while USA got just 68 cents a month. ESPN declined to comment on Verizon's proposal, but a person familiar with the channel's thinking said its current fees reflect the high cost of sports programming and the fact that it can't sell rerun rights for sports, which tend to be watched live, unlike entertainment channels, which viewers increasingly watch at their convenience. Disney drew the biggest share of cable-channel fees last year, with 20.5% of the total, according to SNL Kagan, followed by Time Warner Inc., and News Corp ., which own such widely available channels as TNT and Fox News, respectively. (News Corp. also owns The Wall Street Journal). Time Warner and News Corp. spokesmen declined to comment.

One industry executive said that while big media companies with sports channels are likely to resist it fiercely, Verizon's proposal could be attractive for other companies who argue that they have a bigger share of viewers than of fees. Viacom, which owns channels such as Nickelodeon and MTV, has said that its channels represent 20% of the aggregate ratings of cable networks, but SNL Kagan data show it receives just 7.4% of total cable fees. A Viacom spokesman said that the company wasn't aware of Verizon's proposal.

One cable-network executive said that similar ideas have been floated in past years, but they never gained traction because distributors attempted to cap how much they would pay for highly rated channels. The executive said that "unless there is a giant seismic shift" in the TV landscape, the proposal is unlikely to gain much support from programmers. Despite a sharp audience drop in recent months at most of the major broadcast networks and at several big cable channels, media-company executives have remained bullish about wresting big fee increases from pay-TV distributors for years to come.

Verizon's proposal and Cablevision's lawsuit, however, highlight a long-standing complaint of pay-TV distributors. "It feels like certain content players who have a suite of channels attempt to lever the strong ones to prop up the weak ones...without any empirical data to show that these channels are actually viewed or wanted," said Verizon's Mr. Denson. To implement its proposal, Verizon said it would provide the necessary set-top box data to programmers to report active viewers. Mr. Denson said the proposal could be extended to include viewing on demand and on other devices. Wall Street Journal


Dish Network and DirecTV, the nation's two largest satellite-TV companies and one-time merger partners, may attempt to combine once again. The likelihood of a marriage between the pay-TV providers is "much more likely" now that a telecom company that DirecTV had its eyes on is no longer for sale, an analyst said Friday. Shares of DirecTV and Dish rose on the renewed speculation. DirecTV shares closed at $54.99, up 4.5 percent, while Dish jumped nearly 3 percent to $35.15 amid heavy trading. Brazilian telecom company GVT, a potential DirecTV acquisition target, was taken off the market Friday by parent company Vivendi. "With a potential acquisition of GVT off the table, we believe the likelihood of a DirecTV-Dish merger is much more likely," Macquarie analyst Amy Yong wrote in a research note. "While a DirecTV purchase of Dish would need to clear multiple regulatory hurdles, we believe a deal would deliver near- and long-term synergies, be extremely accretive, and improve both companies' competitive positioning."

Federal regulators blocked a proposed merger between the satellite-TV providers in 2002 over antitrust concerns. Since then, the pay-TV landscape has changed significantly, with telecoms such as Verizon and AT&T launching competing video services. In January, DirecTV CEO Mike White said there would be "strategic merit" in a merger between the two companies. In November, Dish chairman Charlie Ergen said a merger is "one of the things that, I think, probably both companies have to consider." Denver Post


Cablevision shares, among the sector's worst performers over the past year, popped 2.5 percent yesterday after one Wall Street analyst forecast the company would be sold in the next 18 months. Prospective acquirers include Charter Communications and Time Warner Cable, said Jason Bazinet, a Citigroup analyst, whose report pushed up the stock. Neither company responded to requests for comment. A Cablevision spokeswoman said: "As a matter of long-standing policy, Cablevision does not comment on rumor or speculation." Cablevision shares closed yesterday at $14.08, but are down 1.1 percent over the past 12 months while Charter is up 47.5 percent and TWC is up 18.8 percent.

Bazinet, in his report, outlines a scenario that could involve Cablevision's equity falling to zero and says without Optimum West's cash flow, the fundamentals have suffered. Bazinet lowered his price target on Cablevision to $18 over the next year from $19.25 in part because of Cablevision's pending sale of Optimum West (Bresnan Communications) to Charter and higher programming expenses. "It will be very difficult for the [controlling shareholder family] Dolans to materially increase their ownership stake above current levels," the report said. Indeed, Cablevision is keeping the dividend in place, but may be more focused on debt reduction versus equity shrink," Bazinet wrote in the report. There is little incentive for the Dolans to stay the course, he wrote, adding: "If they fail, the equity could fall to zero. If they succeed, the equity value is unlikely." "We think the odds have increased dramatically that Cablevision is sold within the next 12-18 months," he wrote. New York Post

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