Cable's New Giant Flexes His Muscles
By GERALDINE FABRIKANT and BILL CARTER
October 20, 2003
nytimes.com
Maybe the cable industry should have seen it coming. Everyone who knew Brian Roberts, the polite and apparently easy-going chief executive of the Comcast Corporation, understood that he had learned the cable business from his father - Comcast's hard-bargaining founder, Ralph Roberts.
So they should not have been surprised when the son turned out to be as hard-charging as his father, making an unexpected, hostile bid two years ago for AT&T, then the nation's largest cable operator.
His boldness paid off. Brian Roberts succeeded in acquiring AT&T, and when the $50 billion deal closed in November, he had transformed Comcast from the third-largest cable operator with just 8 million subscribers, into the industry behemoth with 21.3 million subscribers, dwarfing its second-largest competitor, Time Warner, which serves 11 million homes.
Now, as the undisputed king of cable, Mr. Roberts is beginning to wield the power that comes with access to 30 percent of the nation's cable households - and control of cable systems in 7 of the nation's 10 largest cities.
That clout, and Comcast's opportunity to exact tougher terms in new contracts with cable channels, could have a profound impact on the economics of the industry.
Cable networks - whether ESPN, Court TV or the Food Network - rely heavily on revenue from the per-subscriber fees paid by cable operators. And with Comcast leading the way, the days of automatic fee increases appear to be over.
As Mr. Roberts flexes his newly found muscles, some cable networks are already finding themselves squeezed. Consider the case of Court TV, the law-oriented channel that is owned by Time Warner and Liberty Media.
Court TV has seen its ratings increase almost 25 percent in the past year. It is spending more on programming than ever before. But under the deal it just finished negotiating with Comcast, the network will receive lower fees for its programming.
"It was a long and arduous negotiation," was about the only thing Court TV's chief executive, Henry Schleiff, would say about the process.
The precise terms were not disclosed, but several people close to the negotiations said that Comcast had reduced the fees Court TV receives for the 13 million subscribers that AT&T once owned. Comcast executives deny accusations that they are strong-arming cable programmers, saying that the company is merely exercising good business discipline by reconciling differences between the old Comcast and AT&T contracts, with an eye toward ending up in each case with the deal least expensive for the current Comcast.
For cable programmers, especially smaller channels, the prospect of a revenue cut is frightening. Some, pointing to the Court TV outcome, say Mr. Roberts's company is applying too much pressure.
But Mr. Roberts says his industry critics "are trying to characterize us as something we're not.'' He and other Comcast executives acknowledge that, having invested $50 billion in their campaign to get bigger, they do feel entitled to certain prerogatives.
"Can I not get a volume discount?'' Mr. Roberts said in a telephone interview last week.
Discounts are important to Comcast, because Mr. Roberts has promised investors that this year alone the company will shed $270 million in program expenses, reducing its overall annual programming budget to $4 billion.
That motivation, coupled with Comcast's geographic reach, gives the company considerable powers of persuasion in any negotiation, analysts say.
"Without distribution from Comcast, it would be virtually impossible for any network to be profitable,'' said Richard Bilotti, a cable analyst for Morgan Stanley. "A programmer may be willing to discount rates to gain the financial insurance of long-term distribution.''
Mr. Roberts describes it as more a matter of cooperation than of coercion: "It is not like we are going to take you off the air if you don't cut your rate. We are not doing that." Instead, he said: "We are trying to build partnerships with the programming channels. That is what the customers want."
Even an executive critical of what he calls Comcast's overly aggressive contract negotiations concedes that the company is mainly taking steps in line with the economic changes rumbling through the cable industry. "Cable is facing some very big issues,'' the executive said, "starting with the fact that they are maxed out on channels.''
The proliferation of channels - many homes are now able to see 200 or more - has made things harder for programmers. So much competition inevitably erodes the ratings of most channels.
Cable operators, meanwhile, know that they can no longer simply pass along fees for additional channels to consumers, many of whom may already feel they have all the program choices they want. Nor can the operators expect, as they have in the past, to add millions more customers each year. With pipes into more than 71 million homes, the cable industry has saturated the nation. That leaves cost cutting as the most obvious way for companies like Comcast to keep more of their revenue.
Many executives expect the brunt of the cost cutting to be borne by small, independent cable channels, because the large programming media conglomerates, like Viacom, wield their own bargaining power. Comcast not only knows that Viacom's channels like MTV and Nickelodeon are must-haves on any cable system; so are the rights to retransmit the signals of the CBS network television stations that Viacom owns in some of Comcast's largest metropolitan markets.
Another reason that Comcast and other cable operators are looking for program savings wherever they can be scrounged is that the companies have run up such large, often long-term financial obligations to secure another cable essential: sports coverage. ESPN, for example, which is owned by the Walt Disney Company, charges system operators as much as $2.60 a subscriber, industry executives say, and many of the ESPN deals guarantee the network yearly increases as high as 20 percent. (By contrast, Nickelodeon costs as little as 30 cents or so per subscriber.)
Comcast's most notable contract renegotiation so far has been its face-off with the pay service Starz Encore. The struggle pitted Mr. Roberts against one of the industry's other most powerful players, John C. Malone, chairman of Liberty Media, which owns Starz Encore.
Almost as soon as Comcast completed its AT&T acquisition last fall, the company filed suit in federal court in Philadelphia, challenging the Starz Encore contract it had inherited. AT&T, where Mr. Malone had been a big shareholder, had granted an extremely favorable deal that picked up a large portion of Starz Encore's expenses. The upshot was that AT&T received far lower fees from Starz than Comcast was accustomed to, and Mr. Roberts wanted to kill the arrangement.
Last month, Comcast and Starz finally settled out of court. Neither side has commented on the details, but Comcast has said that the net effect is that it will save more than $100 million this year.
Several other premium services have also negotiated new terms with Comcast, including Time Warner's popular HBO. In that case, according to executives involved, Comcast did not get a rate reduction - but it did pay a lower percentage increase than in the past.
A Comcast executive said HBO did receive other benefits, including a significant number of video-on-demand channels on which customers can summon reruns of HBO shows. Even as video-on-demand provides marketing benefits to HBO, the capability also gives Comcast and other cable operators a potentially new source of revenue; customers must pay more for the digital cable service that makes the on-demand services possible.
With the prevailing technological and economic forces in the cable industry, some media executives say the shift of power to system operators like Comcast may be inevitable.
"For years the operators were forced to pay increasing programming costs for shows their subscribers didn't want, in order to get the programming that their subscribers wanted," said Jon Mandel, the chief global buying officer at MediaCom Worldwide, an advertising buyer.
"It is like the old Charles Atlas ad: 'Tired of being the 97-pound weakling and having sand kicked in your face?'" Mr. Mandel said, adding that it had only made sense for Comcast to "bulk up.''
Now, it is the little-guy programmers who are watching, warily, to see whether Mr. Roberts will throw his weight around. |
