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September 17, 2010
Time Warner Cable concluded a comprehensive carriage deal September 2 with Disney/ABC Television Group and ESPN for broadcast TV channels and its basic cable networks. The deal was reached one day after a prior agreement expired, averting the threat of channel blackouts.
Both sides received some benefits. Time Warner Cable, which has 12.7m basic cable subscribers and is second in size only to Comcast, gets linear channel streaming rights for Disney-owned ESPN, ESPN2 and ESPNU for TV Everywhere, which allows cable subs to port TV channels to their authenticated video devices such as iPads. Time Warner also gets expanded on-demand rights to Disney/ABC shows including Grey's Anatomy, Desperate Housewives, Castle and Good Morning America, and also Disney cable shows such as Mickey Mouse Clubhouse and Hannah Montana.
For Disney, the accord does more than simply ramp up broadcast station fees. Disney also gains carriage for its ESPN3.com web video outlet to all subscribers of the linear ESPN channel; also gaining carriage is Disney Junior, which is a 24-hour basic cable network for preschoolers scheduled to launch in 2012. The new deal arrangement appears to be a departure from Disney's past practice of tying ESPN3.com fees to the number of the operator's Internet subscribers, as the new pact ties the website directly to the linear ESPN network. Disney further gets expanded promotion of its on-demand offerings, including its new Disney Family Movies online streaming service. A co-branded Spanish-language website, Time Warner Cable/ESPN Deportes, will launch for cable subscribers in Los Angeles.
Judging by similar deals, including the recent TWC-Fox and CBS-Comcast deals, Screen Digest estimates the starting monthly fee at $0.50 per sub per month, escalating to $0.60-$0.75 over the pact's lifespan. Length of the deal was not disclosed, other than being called 'long term'-which suggests at least three years. The parties had gone public with ads explaining their starting positions and the threat of a blackout, but backed away and pulled the ads last week to lower the temperature while they completed the deal.
The pact covers Disney's owned TV stations in TV markets where Time Warner and Bright House (on whose behalf TWC negotiates) have systems: WABC in New York, KABC in Los Angeles, WTVD in Raleigh-Durham-Fayetteville, WTVG in Toledo and their associated HD feeds. As for basic cable vehicles, the accord provides for carriage for ABC Family, Disney Channel, Disney XD, Disney Junior, ESPN, ESPN2, ESPNEWS, ESPNU, ESPN Classic, ESPN Goal Line, ESPN Buzzer Beater, ESPN3.com, ESPN Deportes, SoapNet (which will become Disney Junior in 2012), and ESPN 3D.
Multichannel platforms like Time Warner Cable and channel providers like Disney increasingly reach agreements without channel blackouts that irk subscribers and bring unwanted attention from government regulators. Neither side wants to risk attention, especially now that the Comcast NBCU merger has opened up a window for the FCC to sneak in an industry-wide regulatory intervention. A Disney dispute with New York-area cabler Cablevision, which has 3.1m subs, created a rash of publicity when the ABC Television telecast of the Oscars in March was left in doubt for Cablevision subscribers. A brief blackout occurred prior to both sides reaching agreement at the eleventh hour. Elsewhere, AT&T's U-Verse replaced two Hallmark basic cable networks with other programming early September 1 for its 2.5m subscribers amid a carriage fee dispute.
Time Warner Cable previously led operator resistance to paying cash fees for rights to transmit over-the-air stations. But now most multichannel operators are resigned to the idea that highly-viewed local broadcast TV stations deserve cash payments, though there's considerable behind-the-scenes haggling about precisely how much. Local stations talked up $1/per sub/per month, but seem to be settling at $0.30 to $0.60, although payments are escalating in later years of multi-year carriage contracts.
The push for cash began five years ago when TV station economics deteriorated with the rise of localized new media advertising. Previously, station-owners accepted other inducements such as multichannel operators promising to buy specified levels of station advertising, or favored positions on cable channel lineups, particularly for the cable networks operated by station-group-owning media conglomerates. But now direct cash payment are the norm for local stations of network affiliates-which are outlets for popular series, sports and local news-and also the top independent stations that program popular local news and local sports.
Screen Digest estimates local broadcast TV stations will collect $650-$700m in retransmission fees this year, growing to $2.5bn-$3.0bn by 2014. Faced with higher channel expenses, multichannel operators will likely pass the bulk of increases on to subscribers' monthly bills, including by increasing 'expanded basic' channel tiering-such as extra-charge sports and movie channel packages.
When media giants bundle broadcast stations and basic cable networks in a single carriage deal, how the fee is allocated between all the channels involved is a matter of internal corporate preference within the limits of generally accepted account principles (GAAP). Multichannel platforms and channel providers sometimes spin different versions of how carriage fees are spread out among various components of the same transaction.
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