Oct. 11 (Bloomberg) -- TV blackouts in the U.S. have reached the highest level in a decade and may climb as pay-TV operators fight higher fees sought by content providers.
Disputes over fees have caused five blackouts this year, the most since 2000. They have affected about 19 million pay-TV subscribers, leaving some viewers without access to the Oscars and New York Knicks games. Dish Network Corp., Cablevision Systems Corp. and AT&T Inc. all lost programming while haggling over costs.
Feuds will escalate as pay-TV companies resist the increased fees they typically try to pass on to subscribers in the form of higher cable bills, said Rich Greenfield, an analyst at BTIG LLC in New York.
“There is increasing pressure for distributors to push back on rate hikes in a tough economy where the consumer is struggling,” Greenfield said in an interview. “As programming costs continue to rise, these battles are becoming bigger and higher profile.”
Content expenses, which total about half of pay-TV companies’ operating costs, have increased about 10 percent in the past year, putting pressure on profit margins. Cable bills climbed about 8 percent on average for the year ended in June, according to researcher SNL Kagan.
Cablevision and Dish are currently negotiating with News Corp. over fees for Fox, the home of shows such as “Glee” and “American Idol.” Cablevision’s contract with News Corp. ends on Oct. 15, and Dish’s expires on Nov. 1. If agreements can’t be made by then, Fox could go dark on both carriers.
“It would be terrible business practice to allow any distributor to secure a signal without a valid contract,” Fox said in a statement. “If a provider were to decide to pass on a reasonable offer -- one that was consistent with our other distribution agreements -- then legally they could not re-sell our signal to their subscribers.”
High unemployment and stagnating wages are threatening the consumer’s willingness to pay steeper prices for television services, especially when there’s cheaper alternatives such as Web video and movie-rental provider Netflix Inc., said Chris Marangi, an analyst at Gabelli & Co. in Rye, New York.
“Cable and satellite operators are losing their pricing power,” Marangi said in an interview. “To the extent that there are cheaper alternatives and the economy remains weak, it gets harder and harder to pass along these price increases.”
Content providers, including Burbank, California-based Walt Disney Co., are further aggravating pay-TV companies by offering shows for free on competitive platforms such as Hulu.com, while making distributors pay premium prices for the same programming.
“The idea that the programmers, who are charging more for their programming, are then taking that programming and making it free on the Internet -- that really pushes the envelope,” Jim Dolan, chief executive officer of Bethpage, New York-based Cablevision, said at an investor conference Sept. 16.
This month, News Corp.’s Fox cut its broadcast signal of 19 local sports channels, FX and National Geographic, to Dish subscribers because of a dispute over rate increases. Disney’s WABC-TV pulled its signal to Cablevision customers in March, leaving 3 million homes in the New York without access to the first 13 minutes of the Academy Awards telecast.
“In tough economic times we need to take a tougher stance against programmers to be able to provide the best prices out there for our customers,” Dave Shull, senior vice president of programming for Englewood, Colorado-based Dish, said in an interview. “The DNA of our company is low prices -- we can’t let these costs continue to escalate.”
A La Carte Pricing
The public, high-profile disputes don’t serve the industry well because they can backfire and prompt discussions in Washington about potential a la carte pricing, according to David Joyce, an analyst at Miller Tabak & Co. in New York.
A la carte pricing is a concept that allows consumers to pay for channels individually. Studies show that such a model would limit choices and raise prices, not benefiting the television operator, content provider, or consumer, Joyce said in an interview.
Still, cable companies and satellite distributors are trying to push programmers to allow them to cobble together smaller, cheaper options for their customers. Time Warner Cable Inc., the second-largest cable operator, has been championing the idea to sell less costly packages of fewer channels to lure economically strapped consumers.
“We’ve expressed an interest in having smaller packages,” Rob Marcus, Time Warner Cable’s chief financial officer, said at an investor conference on Sept. 16. “The reality is that our programming vendors have a different interest, which is having the broadest possible carriers they can.”
Less popular channels are often carried by a distributor because they have been tied-in as part of deal with a more popular network. That way, both channels can get broad distribution and produce higher advertising revenue for the programmer. The distributor must carry the less-watched channel in order to get the popular station and can’t strip it out of their packages without losing both.
In addition to raising prices on cable channels, content owners are now also asking distributors to pay for broadcast channels that were previously free. Companies such as News Corp. used to provide their broadcast channels for free in order to gain distribution for new cable channels, like FX.
Chase Carey, the president and chief operating officer at New York-based News Corp., said this year that he thinks Fox is worth $5 a month given its sports programming and prime-time hits like “American Idol.” That would top the most expensive channel on the dial, Disney’s ESPN, which brings in $4.08 for each subscriber, according to SNL Kagan.
The dispute has made its way to Washington. Many of the country’s biggest pay-TV operators, including Time Warner Cable, have signed a petition to the U.S. Federal Communications Commission for the government to require, among other things, stations to keep sending a signal as long as the negotiations continue in good faith. They have also formed a lobbying group called the American Television Alliance to push for Congressional action.
Broadcasters say Washington shouldn’t intervene.
Nearly all carriage negotiations conclude without service disruptions, “and despite the overheated rhetoric coming from pay TV providers, there is no reason to believe that won’t be the case going forward,” Dennis Wharton, spokesman for the National Association of Broadcasters, said in an e-mail.
“Pay-TV operators will have less incentive to engage in meaningful talks for carriage of broadcast TV stations if government regulators inject themselves into these marketplace discussions,” Wharton said.
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