Channels will go dark if deal isn't reached

PDFs: Time Warner Cable letter and News Corp. memo

Fox and Time Warner Cable are in the final hours of a showdown in the face of the Thursday midnight deadline for the sides to cut a deal to prevent Fox-owned channels from going dark on Time Warner systems in New York, Los Angeles and seven other markets.

Execs from the companies were expected to negotiate again Thursday in a last-ditch effort to come to terms before the expiration of the previous contracts allowing Time Warner Cable to carry 14 Fox-owned stations as well as such cable channels as FX, Fuel, Speed TV and 10 regional sports cablers. Fox is seeking a monthly fee of $1 per Time Warner subscriber in exchange for retransmission consent rights to 14 of its stations in markets served by Time Warner Cable. Time Warner has balked at Fox’s demand and is said to have offered about 30 cents per sub.

As the rhetoric from both camps heated up on Wednesday, a source close to the situation noted that with the sides so far apart on price, neither was likely to make a move until the pressure was at its highest as the clock ticks down Thursday. “Why would you blink until you have to,” the source noted.

Sen. John Kerry (D-Mass.), who has waded into the dispute in his capacity as chair of the Senate Commerce Committee’s Communications, Technology and the Internet subcommittee, said late Wednesday that if Fox stations go dark on Time Warner as of Friday, he would ask the FCC to intervene and mandate continued carriage. FCC chairman Julius Genachowski has so far made no comment on the Fox-Time Warner brawl.

On Wednesday, Time Warner Cable said it would agree to the suggestion Kerry made last week that the sides submit to binding arbitration and other steps to prevent the channels from going dark on the cabler’s systems. But News Corp. was quick to respond that it was not open to temporary measures, and that it was not optimistic that a deal would be reached by the Thursday midnight deadline.

Meanwhile, Disney weighed in Wednesday with a statement of support for Fox’s position.

“The hit programming on the ABC Television Network in tandem with the pre-eminent local news and community affairs efforts of our 10 local ABC stations has tremendous value and is worthy of fair compensation,” a Disney spokesman said Friday. “Overall, cable operators pay only about 25 dollars a month for all of the programming on the basic and expanded basic tiers, and they sell this to consumers for some 60 to 70 dollars. Considering these numbers and the fact that operators use these video offerings to up sell even higher margin broadband and phone services, blaming programmers for cable price increases is just plain wrong.”

Disney’s willingness to go on the record in support of Fox indicates the urgency of the retrans fee issue for broadcasters, who maintain that their networks should be justly compensated as top cablers a la TNT and USA Network because the Big Four nets remain among the most-watched channels offered by cable operators.

ABC, CBS and NBC are closely watching the Fox scuffle because they too are looking for major increases in retrans fees when their O&O contracts come up with Time Warner and other top operators. (NBC Universal stations are in an interesting spot, of course, because of the Peacock’s pending takeover by the nation’s largest cable operator, Comcast Corp.) Moreover, the Big Four nets are looking to claim some of the retrans coin that they’re non-owned affiliate stations command — which is sure to add more friction to retrans battles in the coming years.

Time Warner Cable’s move regarding arbitration was an effort to put the onus of the decision to pull the plug on the channels squarely on Fox. But News Corp. chief operating officer Chase Carey asserted that after trying to cut a deal for months, the time for interim steps has long passed.

“Further extensions simply extend the period of time that Time Warner profits from our marquee programming without fairly compensating Fox for it,” Carey, said in a lengthy memo sent to most Fox TV employees on Wednesday morning.

“Our broadcast business cannot continue to build on the success you have achieved as an ad-supported only network. We are not looking for unfair advantages. We welcome competition in the marketplace and simply expect, in fact will demand, that we be fairly rewarded for our results. We have negotiated in good faith to avoid the interruption to our service and we assure you we will continue to do so,” Carey wrote.

Top News Corp. and Fox execs are said to be meeting Thursday on the 20th Century Fox lot with Time Warner Cable programming chief Melinda Witmer and other execs who made a cross-country trek for face-to-face meetings. Because retransmission consent rights for Fox O&Os have been an integral part of Fox’s overall negotiations with cable operators for the past two decades, the Thursday midnight deadline also applies to the carriage agreements for a number of Fox-owned cable channels, though not Fox News Channel and Fox Business Network, as those and other nets are under separate contracts.

As ever, the dispute boils down to a fight over money. Fox, like other broadcasters, is focused on wringing more coin out of cable retrans deals at a time when the economics of the ad-supported broadcasting biz are increasingly challenged.

Britt, in his letter to Kerry embracing the arbitration proposal, said Fox was making “unprecedented demands for cash compensation,” and he addressed the concerns of lawmakers and regulators by asserting that “consumers should not be caught in the middle as broadcasters and video distributors work through these contentious issues.”

Time Warner Cable is said to be offering Fox about 30 cents a month per subscriber; fees of about 20 cents per subscriber have been the cable industry standard for major net affils in recent years. News Corp.’s Carey has said that Fox stations are probably worth as much as $5 a sub, given the exclusive primetime programming and NFL franchise. There’s been speculation that Fox would settle, in this contract go-round, for a fee in the realm of 60 cents-70 cents per sub. CBS is said to have commanded about 50 cents per sub in a long-term retrans pact inked in February with Time Warner Cable, though that deal also included compensation for the Eye’s Showtime pay cabler.

Kerry’s involvement indicates the high public profile that the Fox-Time Warner Cable retransmission consent contract wrangle has taken on in the past few weeks. As the contract expiration loomed, both sides have engaged in an extensive PR campaign — complete with dueling websites (Time Warner’s RollOverOrGetTough.com and Fox’s KeepFoxOn.com), TV spots and full-page newspaper ads — to plead their cases to viewers.

Also Wednesday, Carey responded to Kerry’s Dec. 22 letter suggesting arbitration before the FCC.”We strongly believe this is an issue that needs to be settled at the bargaining table and that binding arbitration all too often looks to the past, not to the future,” Carey wrote.

CBS Corp. boss Leslie Moonves has been vocal about the Eye’s intention to continue push hard for higher retrans fees, but on Wednesday a CBS rep declined comment specifically on the Fox-Time Warner Cable situation.

There’s no doubt that cable operators have gradually been forced to pay higher fees to broadcasters. According to a report by research firm SNL Kagan, TV stations will earn a projected $933 million in retrans fees in 2010, compared with a projected $739 million this year. Moonves told a Wall Street confab earlier this month that he expects CBS’ 29 stations will bring in $200 million-$250 million in retrans fees by 2012.

Time Warner Cable is the nation’s second-largest cable operator, with nearly 14 million subscribers, including those of cabler Bright House Networks, which Time Warner Cable reps in retrans negotiations. The markets where Fox-owned stations (either Fox or MyNetworkTV affils) are carried on Time Warner or Bright House systems are: New York, Los Angeles, Chicago, Dallas, Bost
on, Detroit, Orlando, Fla., Tampa Bay, Fla. and Austin, Texas. In Chicago, Boston and Detroit, however, the Time Warner systems only serve small pockets of viewers outside the central city areas.

Cable operators by law have had to negotiate with TV station owners regarding the carriage of their signals since 1993. Under FCC rules, TV station owners have two options: They can elect to go with the “must-carry” option, in which the cabler does not pay for the signal but the station is assured of a slot on the cable system lineup; or the station can elect to negotiate a retransmission consent fee, in which there is no certainty that the station and cable op will come to terms.

Yet another wrinkle in the Fox-Time Warner dispute is the fact that Time Warner is claiming that Fox failed to provide adequate notice more than a year ago that it intended to seek retransmission consent fees for its two stations in Dallas, Fox affil KDFW and MyNetwork’s KDFI. As such, Time Warner is claiming that under FCC rules it had the right to assume that the stations would go for the must-carry option, meaning that Time Warner systems in Dallas would not be forced to drop those stations as of Friday.

Unsurprisingly, Fox strongly disputes Time Warner’s assertion and maintains that the cabler will be in breach of contract if it does not have a new pact for the Dallas stations by midnight Thursday. With Dallas being a big football town, the loss of Fox’s coverage of the Dallas Cowboys game on Sunday, in addition to various Bowl games set for early next month, would likely raise the ire of many Time Warner customers in the market.

Fox’s PR campaign has urged viewers in Time Warner markets to consider switching to another subscription TV service such as satcasters DirecTV (which Carey formerly ran before he returned to News Corp. in July) and Dish Network or telco services from AT&T and Verizon. Dish Network has moved quickly to capitalize on the headlines about the dispute, running print and radio ads in some of the affected markets offering a special low-price $25 a month startup package, discounted for 12 months from the regular monthly fee of $40.

PDFS

Letter from Time Warner Cable CEO Glenn Britt to Sen. John Kerry regarding the Fox retransmission consent negotiations.

Memo from News Corp. COO Chase Carey to News Corp. employees

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