Cable Wars: Why Viacom and DirecTV's Fight Was Just the Beginning

This story first appeared in the August 3 issue of The Hollywood Reporter magazine.

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Executives at Viacom and DirectTV likely breathed a sigh of relief July 20 as their 10-day standoff ended and 17 channels, including Nickelodeon, MTV and Comedy Central, returned to DirecTV's 20 million U.S. subscribers. But those who believe the recent rash of rancorous carriage fights -- Hearst and Time Warner just settled; AMC and Dish Network are still at war -- is only a temporary blip on Hollywood's radar might be very mistaken.

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In fact, according to industry analysts, 46 percent of publicized agreements this year were struck only after a signal blackout. And my belief is that the so-called "retrans" battles will get more heated rather than subside. History gives us a partial explanation.

In the early 1990s, "must-carry" legislation allowed the Big Four television networks to require cable and then satellite carriers and telcos (dubbed MVPDs) to carry their owned-and-operated stations or to negotiate terms of "retransmission consent" -- pay consideration in cash or in carriage of new channels.

Practically all of the networks used this legislative largesse to require MVPDs to carry new affiliated networks like Bravo rather than insist on a monthly per-subscriber fee. But, as media analyst Jessica Reif Cohen pointed out, when the market became bloated with hundreds of channels (around 2006), broadcasters began demanding cash payments -- "retrans fees" -- instead. Still, even though broadcast networks had two to five times the ratings of cable networks and offered high-priced, quality, live programming beyond the reach of their cable counterparts, the MVPDs were reasonably successful in keeping a lid on the fees paid to the Big Four. Indeed, before 2010, retrans fees to cable channels amounted to about $30 billion, while payments to broadcasters were less than 5 percent of that figure.

The retrans deals usually had terms of three to five years (though lately, Big Four deals are much longer). Therefore, deals that were made from 2006 to 2009 are just now expiring (e.g., Viacom/DirecTV), and broadcasters and their studio wings have decided that retrans fees provide the biggest spike possible in their cash flow. In the recent Viacom-DirecTV deal, for instance, Viacom reportedly will receive $100 million in additional fees over seven years. This is especially helpful given the declining viewership and higher cost of new programming (scripted shows now cost $3 million to $4 million-plus an hour to produce or license).

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Indeed, even with enhanced digital distribution rights from the likes of Netflix and Hulu, broadcasters are stuck with digital pennies -- or, at best, dimes -- compared to linear ad dollars or license fees. So retrans offers the best financial opportunity available. From 2010 to date, the retrans deals of the Big Four and significant station groups have generated a 30 percent annual growth rate and -- absent some major disrupter like the streaming service Aereo or an equivalent that the courts or regulatory bodies approve -- this growth rate is likely to continue.

What's the solution? A column in the Los Angeles Times recently suggested the entire problem can be solved by requiring a la carte pricing for each channel or network, ignoring the fact that it would require radical regulatory and statutory changes and likely decimate independent local TV stations and cable channels. A WGA West official opined, in a parallel context, that technology that promotes ad-skipping is an opportunity -- not a threat -- because it will increase retrans fees and consumers would be "happy to pay a premium" for added flexibility. Is he kidding?

Lobbyists are loving every moment of this fight, but the political solutions are diametrically opposed -- and internally inconsistent. The MVPDs would abolish "must-carry" rules. Why should a cable company have to pay for a signal that's free over the air? On the other hand, they would require binding arbitration of retrans disputes and prohibit shutdowns.

In this scenario, a broadcaster's retrans fees would be greatly diminished, especially the fees of less powerful TV stations; as a result, the broadcaster would reduce its financing of costly (scripted) programming. But consumers would still be forced to pay for cable networks and channels. Indeed, the Big Four and major cable-channel providers likely would increase their payments from MVPDs so the consumer would arguably end up paying more for less.

The broadcaster-programmer consortium, by contrast, would abolish "most-favored nations" deal clauses (allowing distributors to get the same terms as other outlets) and, in an antiregulatory step, would ban arbitration.

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Channel owners and distributors will continue to fight over these issues, as well as a la carte channel distribution and over-the-top rights. Several negotiations are about to begin, including Fox-Comcast and CBS-DirecTV. Complex issues do not breed simple solutions.

Ziffren is a partner at Ziffren Brittenham and an adjunct professor at UCLA School of Law.