Cable dispute could shape TV's future

News Corp.'s 12-day blackout of WNYW/5 and WWOR/9 on Cablevision is a struggle for the future of the television industry and who pays for it. If the dispute is not resolved by this evening, 3 million Cablevision subscribers will be unable to see Wednesday's broadcast of the World Series.

Two powerful companies -- one a broadcast network, the other a cable operator -- have drawn a line in the sand as they attempt to create a workable model to conduct business five, even 10 years from now, according to industry analysts and executives.

What has made the outcome of this particular dispute so difficult to predict, the experts say, is that neither entity can agree on what different kinds of programming should cost and who should pay for it.

For News Corp., which owns the Fox Network, the future will be driven by its ability to raise rates, or so-called "retransmission fees," that cable operators pay them for each of their subscribers. Saddled with huge programming costs, especially for sports programming, and declining ad revenue, broadcasters like Fox believe retransmission fees -- which are often renegotiated every three years -- will be the only way they can continue to air quality TV shows and major sporting events.

Meanwhile, Cablevision -- which owns Newsday -- wants to create a standard that will avoid blackouts like this one without significant rate increases every time a broadcast retransmission deal comes up for renewal, analysts say.

Throughout this dispute, which began Oct. 16 when Fox pulled the plug on the two channels, Cablevision has called for binding arbitration, which News Corp. has rejected. At the same time, Cablevision has tried to draw the Federal Communications Commission into the talks. More than 50 elected officials have echoed Cablevision's call for arbitration. Neither News Corp. nor Cablevision would comment for this story. 

Seeking a structure for fees
"Cablevision wants a structure built around these types of negotiations so they don't have to go through this every time," says Vincent Vittore, principal analyst and specialist in "video infrastructure" with the Yankee Group, a Boston-based consulting firm.

"It's clear that the rest of the cable industry is kind of rooting for Cablevision and that this has become a defining moment in this whole issue of retransmission," says Richard Aurelio, former president of New York Time Warner Cable, the nation's largest system. "Cablevision is trying to draw the line because the retrans issue is getting totally out of line."

Cablevision says it now pays News Corp. $70 million for Fox broadcast and cable channels and that Fox is asking for $80 million more. News Corp. has denied that but won't publicly say what it is asking for.

Another sticking point in the dispute involves "bundling," in which broadcasters ask cable operators to pay for a package of both its broadcast and cable channels. Cablevision has sought to "unbundle" Fox's cable networks from the package and pay fees only for the broadcast stations, according to a filing to the FCC on Monday. Fox has refused, according to its filing to the FCC.

New revenue for networks
The issue of broadcast networks getting retransmission fees is a comparatively recent development. Until 2005, most U.S. TV stations elected to be on cable systems' basic tier without getting compensation in return.

Industry observers say several factors forced broadcast stations to begin seeking fees. First, ad revenue and ratings had begun to bottom out, leading station owners to conclude that the old advertising-based model had become obsolete.

Second, with sports events among TV's most lucrative and popular offerings, the broadcast networks (as well as ESPN) have agreed to pay billions of dollars to broadcast everything from the NFL to NASCAR to the Olympics. Fox will pay nearly $6 billion over the life of an NFL contract that commenced in 2006.

Almost all of these contracts are up for renewal three to four years from now, and broadcasters say they need the retransmission revenue to secure new rights deals. The networks can use these major TV events as bargaining chips in negotiations with distributors, such as cable and satellite operators.

Finally, TV stations realized that direct-broadcast networks like Dish and DirecTV were paying them to carry their signals. Why not get money from cable operators, too?

Those retransmission fees can be lucrative. SNL Kagan, a Charlottesville, Va.-based telecommunications researcher firm, estimates that U.S. stations earned $762 million in these fees in 2009, up from nearly zero just four years earlier.

"It's big money," wrote Craig Moffett, cable analyst with the New York-based equity firm Sanford C. Bernstein, in a recent industry white paper. If each network affiliate "in each market were to receive $1 per month per subscriber, then cost to distributors . . . would rise by $4.5 billion annually, according to our analysis."

While no broadcaster is believed to be getting $1 per subscriber -- the exact amount for all of these deals is closely guarded -- many analysts have said companies are now getting anywhere from 40 to 70 cents per subscriber, and looking to the future for higher amounts. The broadcast industry looks enviously at ESPN's estimated average $4.50+ per subscriber per month from cable operators.

 Satellite operators next?
And now Fox may find itself in another dispute. Dish Network's contract with Fox ends Monday. In a statement made before the Cablevision stalemate, Dish criticized Fox for "demanding" a rate increase of "more than 50 percent." Fox disputed the figure. Now, both companies also appear headed for a showdown.

Former Time Warner chief Aurelio says an end to the current Cablevision-Fox standoff may not happen in the immediate future.

"Chuck is every bit as tough a negotiator as [News Corp. chairman] Rupert Murdoch. These are two tough hombres. It's a question of who will blink first."