News nets could be next players in carriage wars

After feud, Lifetime restored to 12 mil Echostar subs

By JOHN DEMPSEY

EchoStar customers who wanted to ring in the New Year by watching a rerun of "Golden Girls" were in for a rude awakening: Lifetime, the cable net that carries it, had disappeared from their satellite service.

After a month of bickering, EchoStar's Dish network and Lifetime patched up their differences earlier this month, restoring the channel to 12- million subscribers. But Lifetime vs. Dish could be a harbinger of what promises to be an increasingly combative relationship between networks and cable/dish operators as they grapple over fees and contracts.

It's a high-stakes game: Industry analysts say basic subscribers may have to put up with more disruptions as networks and operators arm wrestle on the negotiating table.

Take CNN, which harvests a monthly fee of roughly 44¢ a subscriber, yielding an annual revenue stream of more than $450 million, according to Kagan Research.

Channels such as CNN and Lifetime are ubiquitous in the cable world but are watched during an average night by relatively few of those subscribers. Nielsen may take a seat at the bargaining table as ratings begin to play a bigger role in operators' willingness to drop nets if they make exorbitant demands -- leaving subscribers caught in the middle.

For example, CNN, hammered in the Nielsens by Fox News over the past few years, will face some stiff resistance from operators when the current deal expires because the ops are resigning themselves to gigantic increases from Fox. Scenarios like CNN vs. Fox News will play out across the cable-TV landscape.

Cable operators and satcasters "are preparing for trench warfare to keep cable-network rate increases to the low single digits," says Boston-based media consultant Rob Stengel.

Underscoring the bitter battles that lie ahead, a consortium of small- and mid-sized cable operators are using a recent Kagan Research study to insist they are being wildly overcharged by some cable networks.

Based on a formula that links cable-net revenue to ratings, the Feb. 8 Kagan report cites five networks that have soaked cable operators with double-digit, compound annual increases in their rates since 1995: CNBC (23.1%), CNN (21.7%), FX (20.5%), Discovery (14.4%) and USA (13.1%). Fox News comes off well against CNN in this survey because it charges operators a monthly fee of only 25¢ a subscriber.

Fox News' 10-year contracts with operators start expiring in October, however, and the feisty network is preparing to demand a record increase that could quadruple the monthly price to $1 a sub, with the option of a lower fee (80¢ plus) if the operator agrees to take a business channel that Fox News is developing.

"Fox News is a political juggernaut, and one of the top players in the cable business," says Dennis Miller, an industry observer and general partner in Spark Capital. "No cable operator is going to mess with Fox."

If a cable op dumps Fox News, Miller says the network's sibling DirecTV could engineer an all-out market-by-market assault urging those subs to switch over to satellite so as not to miss one "O'Reilly Factor" diatribe.

But Bruce Leichtman, head of his own media-research group, says cable ops may be able to hold out longer and take bigger risks because they're drawing more of their revenues from ancillary businesses like high-speed Internet access, cable telephony and video on demand.

So the ops may be ready to hold the line when the NFL Network tries to break through with humongous increases from its current monthly fee of 20¢ a sub. The NFL Network will point out that for the first time, it will carry a package of eight regular-season post-Thanksgiving NFL games on Thursday and Saturday, a bundle that the league was offering to competing networks for a license fee of $400 million a year. These games begin on NFL Network in 2006.

Of course, most negotiations seldom stop at any single network, thanks to consolidation of media ownership, which has strengthened the bargaining power of the cable networks. Nine of the top-10-rated cable networks in total primetime viewers for 2005 are owned by one of the five showbiz goliaths (which all control multiple channels): Time Warner (TNT, TBS, Cartoon Network), NBC Universal (USA, Sci Fi Channel), Viacom (Nick at Nite, Spike), Walt Disney (ESPN) and News Corp. (Fox News). The 10th, Lifetime, is co-owned by Disney and the Hearst Corp.

Three of these five companies have another potent weapon to use against cable ops: the right to carry TV stations owned by NBC U, Disney/ABC and News Corp./Fox.

These broadcasters schedule some of TV's most popular shows, from "American Idol" to "Desperate Housewives" to "Law & Order," which the ops can't afford to drop.

Another element in this latest skirmish is the threat of so-called "a la carte" cable pricing, allowing customers to order only the basic channels they watch.

The smaller cable ops are so upset at constantly being hosed down with increases by cable nets that they're ready to embrace a la carte. Smaller ops could come out better because they'd basically split the fee with the network.

But networks hate the idea of a la carte, and the big distributors like Comcast, DirecTV, Time Warner Cable and Cablevision all own networks that could go out of business if not enough people were willing to buy them for a separate monthly fee.