Tuesday, March 26, 2013 4:15 PM ET
By Deborah Yao
DIRECTV is seriously considering not carrying the Pac-12 Network and Comcast SportsNet Houston if they cannot agree on a price during contract negotiations.
Dan York, chief content officer of the satellite TV operator, told SNL Kagan that he is willing to walk away if they cannot come to terms. "We can't say yes to everything. The price has to be fair. … If not, sometimes you just have to say no," he said.
The operator said fans of the Houston Astros can watch the games on FOX, TBS, MLB Network and ESPN as well as listen through several radio stations.
DIRECTV's stance is the latest salvo in the battle against rising programming costs.
Verizon Communications Inc. recently approached several smaller cable networks with a proposal to pay for actual viewership instead of the total number of pay TV subscribers the cable channel reaches, which is the current practice.
"That's not a new concept," York said. The idea has been floated during negotiations, but Verizon made it public. He said operators are now battling to get share from each other in a mature TV market as programming costs are rising faster than ever. Meanwhile, operators cannot increase their prices to match, he said.
York's counterpart at Verizon, Terry Denson, justified his proposal by pointing to the seeming unfairness of the status quo: "We are paying for a customer who never goes to the channel," he told The Wall Street Journal in a March 17 story.
A Verizon spokesman confirmed to SNL Kagan that it has begun talks with several smaller media companies about the new structure, but admits it has not approached large programmers. While the shift would not lower Verizon FiOS customers' bills for now, over time the hope is that it would stabilize programming costs because fees would increase only if viewership rises.
Crown Media Holdings Inc. CEO Bill Abbott told SNL Kagan that he would "love" to be paid for viewership onHallmark Channel and Hallmark Movie Channel. SNL Kagan analyst Derek Baine said Hallmark Channel receives only $162 per average viewer — or 6 cents per subscriber per month — even though it is a top 10-rated network.Walt Disney Co.'s ESPN, meanwhile, commands $7,757 per viewer and more than $5 per sub, but its audience is not commensurately larger.
For the week ended March 17, Hallmark Channel was watched by 408,000 households for live and same-day viewing, according to Nielsen's prime-time ratings. In contrast, ESPN was watched by 1.24 million, or triple Hallmark's audience. But ESPN charges an affiliate fee that is more than 83x Hallmark's 6 cents per sub.
For their part, Cablevision Systems Corp., DIRECTV and Verizon have started charging an extra fee for regional sports networks.
And Cablevision Systems Corp. is suingViacom Inc., accusing the media company of illegally tying the availability of certain popular cable networks to carriage of the less-popular channels. Time Warner Cable Inc., meanwhile, has dropped Ovation because of its low viewership on its system and threatened to cut more networks.
But will these tactics change the practice of bundling cable networks?
"Maybe not directly, but all could serve as leverage at some point for operators looking for some added heft in negotiations," said SNL Kagan analyst Ian Olgeirson. "Our long-term outlook does not forecast a collapse of the current bundle."
However, that does not mean other changes are not coming.
"I am not sure if it's the bundle that operators object to or if it's just the magnitude of the yearly increases," he said. "Either way, it's clear the operators are saying something has to give — either the number of channels or the annual fee increases."
Pay TV operators are getting increasingly frustrated. They are upset that media companies are forcing distributors to pay for cable channels they do not want and then turn around and put their content on the Internet, making it easier for consumers to cut or trim the cord. Online video provider Hulu LLC, for example, is owned by three major broadcasters.
Operators also complain that networks are losing live sporting games to cable, making their content less valuable, yet their retransmission fees keep rising. And then sports networks themselves command the highest affiliate fees, the chief of them being ESPN. The creation of new RSNs, such as those owned by Time Warner Cable and Comcast Corp., will hike programming costs even more. These RSNs typically command affiliate fees of $2 to $4.
With such price pressures, some changes to the ecosystem are inevitable, said Dave Novosel, an analyst at Gimme Credit, in an interview with SNL Kagan. He said presence of the over-the-top providers such as Amazon.com Inc., Netflix Inc. and Hulu changes the dynamic.
"This whole system is changing," he said. "Over the next two years, we'll see other types of models come forward."
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