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Thursday, October 23, 2014

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  • Cablevision vs. Viacom: Is Cable's Internecine Battle Finally On?

    Yesterday, Cablevision announced that it has filed suit against Viacom, seeking, among other things, to void a carriage deal it struck just 2 months ago. Cablevision is alleging that Viacom illegally coerced it into carrying 14 of its low-rated cable networks in order to get access to the 8 popular ones Cablevision really wanted.

    The most obvious first question to ponder is why would Cablevision agree to a deal in December, only to sue to nullify it in February? Surely the presiding judge will ask something similar. If Cablevision was so perturbed by Viacom's negotiating position, why not bite the bullet and sue then? Another interesting question is that given bundling has been upheld by the courts in the past, what's different this time around?

    I don't have any insights on those questions (and no surprise, Viacom swatted Cablevision's allegations away in a blog post), but what I can say is that this is just the tip of the iceberg of a larger story playing out in the pay-TV world. Every cable operator executive I talk to is apoplectic about programmers' bundling and rate increase demands. Operators complain that stuffing the channel lineup with a bunch of programming most viewers don't watch diminishes their ability to nimbly package as they see fit. They are also unable to fully pass on rate increases to subscribers, so their video margins are getting killed.

    Bundling is an old concept in the pay-TV business, but as long as subscribers had few alternatives, operators were able to pass along rate increases and all was (reasonably) well. What's different now is that at $70-80 for a basic digital channel lineup, the bundle has become expensive for most Americans, and, for the first time, low-cost, over-the-top online services (e.g. Netflix, Hulu, etc.) represent a bona fide alternative for a growing segment of the population.

    But whereas operators seem appropriately worried about this unfolding dynamic, cable programmers seem practically oblivious. In the early days of cable, bundling helped their fledgling networks gain awareness and audience. Now bundling is too often used as a bludgeon to gain retransmission consent fees for broadcast siblings, to recoup the out-of-control fees being paid to sports rights-holders, and, as Cablevision asserts, to jam low-rated networks into the lineup that few viewers really care about.

    By filing suit, Cablevision is effectively saying enough is enough. But while other pay-TV operators offered up words of support, is Cablevision vs. Viacom the beginning of cable's internecine battle? Probably not. A mass operator uprising is unlikely because industry carriage deals are long-term and expire at staggered intervals, there's little evidence of fed-up subscribers cutting the cord, and importantly, there are lots of personal financial incentives and perks on the line for industry executives not to upset the apple cart too much.

    However, over time these factors will matter less and less. My prediction is that like it or not, the market is going to resolve this for the industry. Lured by better online alternatives, larger numbers of consumers will either opt out of pay-TV's expensive bundles or never sign up in the first place. As this occurs, the pay-TV industry as a whole will be forced to acknowledge these new realities, or risk being marginalized.