The recent dispute between Time Warner Cable and Viacom, resolved as the New Year’s Eve deadline approached, will become increasingly typical as we travel through the next nine months of US and global recession.
The dispute was a renewal of 16 Viacom cable TV channels, with initial calls for a 25% hike in fees, finally ending in an undisclosed increase, thought by many to be around 12%.
The bitching on the TWC side of the equation was to ask why it should pay more for a set of TV channels which are attracting less viewers than in previous years, which are also being shown free on the internet.
The answer which Viacom could point to was a) These are cheaper than you can get any other channels which pull this many viewers, and b) we have subsidized the pricing because we had solid and rising advertising revenues in the past and needed scale to drive advertising. Now as advertising falters, we need payment.
There are many forces moving in this equation, and all of them are at the very heart of the Faultline concept ‘ the image of a break in the way analog entertainment markets are served, which results in new owners of those markets in their digital format. While cable companies have managed the switch from analog to digital, the arrival of digital video formats has stimulated multiple layers of delivery ‘ through the internet, on handsets, on PCs, through the internet to a TV set, in cars, over satellite networks and digital terrestrial services ‘ and each one represents a fragmentation of video delivery. The cable operators have gone from a market where they were the biggest game in town, versus free to air broadcasting, to one where there are multiple formats ‘ physical in DVD, online, and portable and cellular ‘ which all want the same content. That’s a transition from a buyers market to a sellers market and when a content company is less dependent upon one sector for its revenues, it can start to raise the stakes on pricing.
The cable companies for their part have, over the past five years, fought back. They have done this in number ways. Ramping ARPU by offering multiple extra new services such as VoD, including PPV and VoD film services, set top based gaming and music, network PVR and set top DVRs, as well as opening up their own advertising front on the DVR, on VoD programming, and within nPVR delivery. Some of them have also tried to establish significant online presences, often driven by advertising and by buying their own cable TV networks. So companies like Comcast and TWC now compete more directly with their own content suppliers, for advertising and for carriage fees. This will inevitably add an edge to the previously balanced negotiations.
Add to that the prospect of a recession where advertising revenues are the first to be hit, and you have a ‘them or us’ scenario, where both cable operators and content businesses lose out on advertising, and this sets them at each other’s throat over the price of carrying TV channels.
If you delve down into the Viacom figures for the third quarter (Fourth quarter not quite out yet), which published in early November, the first hints of recessionary trends were showing. Advertising in the quarter fell from $1.18 billion to 1.15 billion a fall of around $30 million in a single quarter. Previous quarters were rising.
But that was a quarter which included July and August and really most of that might have been lost in September. As the news of recession amplified and as advertising commitments began to come to an end, you would expect significant falls during the fourth quarter, with more to come in the first two quarters of next year as new contracts come into force. That could easily materialize into a drop three or four times the size of its last set of figures, and a decrease of $400 million over a year is not impossible. Viacom executives will already have pretty good visibility of this internally and so will analysts. Time to play the strong content hand and up everyone’s fees.
About $300 million of those Viacom content fees come from TWC every year, and a 12% increase would take this up by around $36 million. Do that across all of cable in the US, and there would be a decent swing in carriage and affiliate fees. But do it across the entire world, and given that MTV and other properties show in upwards of 90 countries, and it could more than make up for the ravages of a weakened advertising market.
And Viacom is particularly in need of this, given that its film properties have taken a big downturn compared to last year and that trend doesn’t look like it will change. It had success with Transformers a year earlier, and Iron man last year, then some international and DVD success with both of them, but it has scaled back the number of blockbuster movies it is funding and has little in the theatrical tank for the Christmas season that will be announced shortly. Already is it making a loss in films, and how much worse will this get in a quarter empty of major releases. If advertising and feature films are about to drop off the scale, then there’s an awful lot of revenues resting on cable network fees and the company will have to reverse a 14% upwards trend in costs at the same time.
You can see the kind of mentality that allowed company executives to risk major advertising revenues at TWC and play brinkmanship games which suggested that the TWC channels could go dark after New Year.
But how much more desperate would executives at TWC be to preserve their 13 million plus subscriber base at a time when it would be feeling the pinch from the recession, both in terms of customers trading down to cheaper packages, spending less on VoD and PPV and falling revenues in any advertising areas it was building up. And being a separate company from Time Warner these days, this is just the beginning of a period of rethinking for the company.
You can add to this the idea that during the run up to February and beyond, every other cable operator expects to add 5 % or 6% to its customer base at least, from consumers unwilling or unable to make the transition to digital terrestrial ATSC transmissions as analog TV is cut off. If TWC was to have a major SNAFU in content agreements on the eve of that, albeit temporary, one off gorging on new customers, it would have been disastrous to its share price.
The channels affected by the dispute at Christmas were Comedy Central, Logo, Palladia, MTV, MTV 2, MTV Hits, MTV Jams, MTV Tr3s, Nickelodeon, Noggin, Nick 2, Nicktoons, Spike, The N, TV Land, VH1, VH1 Classic, VH1 Soul and CMT: Pure Country.
And as we said, we would expect that more cable, and many other pay TV operators which are not cable, will be squeezed by similar disputes, in the US and around the world, because these disjoints are structural, and there will be plenty of pain in getting used to the new economy.