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August 5, 2013

Time Warner Cable: CBS should be sold 'a la carte'

LOS ANGELES —

Time Warner Cable Inc. CEO Glenn Britt has offered to end a four-day blackout of CBS stations in three major cities, saying the cable operator would allow CBS to sell its stations' signal "a la carte" to consumers instead of bundling it with other channels.

That would "allow customers to decide for themselves how much value they ascribe to CBS programming," Britt said in a letter to CBS CEO Leslie Moonves that was released to the media. CBS Corp. said it is formulating a response.

CBS signals have been blacked out to some 3 million Time Warner Cable subscribers in New York, Los Angeles and Dallas since Friday in a dispute over how much the cable operator has to pay for CBS programming. Britt's proposal is a radical departure from how TV is sold today — in packages that can contain a hundred or more channels, many of which consumers don't watch. Craig Moffett, an industry analyst with Moffett Research LLC, called the proposal "mostly a bit of theater" that CBS would never accept.

"CBS would never agree to a model where customers could opt to take it or leave it," he said. "The economics of that would never be as attractive as the current model, where everyone has to pay whether they want the service or not."

Investors seemed to shrug at the proposal. Time Warner Cable shares slipped 68 cents or half a percent to finish at $116.42. CBS shares dipped 67 cents, a little more than 1 percent, to close at $53.86 Monday.

TV station owners like CBS want to boost revenue and profit from the fees they charge to distributors — and many industry observers see this as their prime engine of growth in the coming years. But pay TV distributors say they're trying to keep costs low to hang onto subscribers sick of paying higher monthly bills. Retransmission fees paid by cable, satellite and telecommunications providers are set to double by 2018 to $6 billion, according to research firm SNL Kagan.

The fee fights have become common in recent years. Most have been resolved within a few weeks. However, the American Television Alliance (ATVA), a grouping of pay TV distributors, says there are now a record 79 U.S. markets being affected by blackouts. Besides the Time Warner Cable dispute with CBS, starting on Thursday some Dish Network Corp. subscribers lost access to some ABC, NBC and Fox affiliate stations owned by Raycom Media Inc. in 36 markets in 15 states from Florida to Hawaii.

Tens of thousands of DirecTV subscribers lost access to a local CBS station in Odessa, Texas, on Thursday. Five other blackouts are ongoing, including one between Cox Communications and Mt. Baker Cable in Seattle that has lingered since Jan. 1, 2012, according to the ATVA.

The basis for all of the disputes is the 1992 Cable Act, which allows TV station owners to either force pay TV operators to carry their signals for free, or bargain for carriage at whatever rates they can extract in negotiations. Since then, leverage in such negotiations has shifted dramatically in favor of the content owners, who can demand higher fees or pull their signal. Cable TV operators have usually been forced to pay higher rates or risk losing subscribers to satellite TV companies, a shift that has been happening for years.

But the situation has gotten so dire that DirecTV, which in the past has seen competitor blackouts as a way to steal subscribers, rallied to Time Warner Cable's defense in a statement on Saturday, saying "all pay TV customers are feeling trapped and helpless" by "ridiculous" rate increase demands.

The longer the fight goes on, the greater the chance that Congress gets involved to balance the playing field, said Rich Greenfield, a media and technology analyst with BTIG Research. "Having the government poking their nose into the situation could be decidedly bad for CBS," he said.

Legislation isn't pending, but lawmakers and lobbyists are considering folding new retransmission rules into a bill required to renew the license of satellite TV operators DirecTV and Dish by the end of 2014. Hearings on the matter are likely to start up around late September, according to ATVA spokesman Brian Frederick. "Our video laws need updating now more than ever," he said.

Consumer outrage over the blackout has been similar to past disputes, according to Time Warner Cable spokeswoman Maureen Huff.

The company has been offering pro-rated rebates to the some 2.5 million Time Warner Cable subscribers who pay extra for CBS-owned Showtime, which has also been blacked out during the fight. Dor the time being, the cable operator has replaced CBS with programming from Starz Kids and Family.

With so many blackouts at so many different TV operators, including the satellite players, switching providers might not help.

"People understand increasingly that switching is not the answer," said Time Warner Cable's Huff. "If you switch to another provider, they're going to face the same situation the next time they're up with CBS."

Customers could be getting desensitized to blackouts because they occur so frequently.

And the level of outrage might be muted because the fight is occurring during the summer, when networks don't debut many new shows.

Besides CBS's new hit, "Under the Dome," which it premiered in June thanks to a special arrangement for exclusive online access on Amazon.com, subscribers only missed new episodes Sunday night of Showtime's "Dexter," in its eighth and final season, as well as "Ray Donovan," a Showtime series that began in June.

That's not the same as missing an NFL regular season football game, or even a preseason game, which won't air on CBS until Aug. 23.

"Viewers are outside in the sun," said Laura Martin, a media industry analyst with investment bank Needham & Co. "If CBS was in the middle of its prime-time schedule, they would be much more annoyed."

But the wide array of online viewing options is not an effective substitute for the programs that CBS offers, especially its live sports offerings, including golf, Martin and other industry observers said.

Acknowledging the greater number of viewers who watch TV shows online, CBS took the unusual move of blocking video access on its apps and website to people who get their Internet service from Time Warner Cable, including those who get TV packages from other providers. Even though millions of Time Warner Cable subscribers couldn't see Tiger Woods claim his eighth victory at the Firestone Country Club on Sunday, industry watchers said that wasn't as important as NFL football, which has its first regular season games on CBS on Sept. 8.

It's unlikely that Time Warner Cable will drag out the dispute that long, said analyst Moffett.

"The closer we get to football season, the more the leverage shifts to CBS," Moffett said. "Once the football season begins, it's game set and match in CBS's favor."

 

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