Viacom net raises eyebrows

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Sunday's bombshell announcement about Viacom, MGM and Lionsgate entering the premium cable and VOD space was ricocheting around Hollywood on Monday, giving conspiracy theorists a field day.

Cable industry observers were left wondering whether the newly anticipated pay TV channel is for real or simply a bluff in continued negotiations between Showtime and the three venture partners, which have long-term movie output deals with the pay cabler.

Conspiracists see clues to the phantom-channel theory everywhere, including the suspicious lack of detail in the launch announcement, which was oddly scheduled on a Sunday afternoon — read by some as an attempt to evade scrutiny in the media or on Wall Street.

Viacom had no comment on the suggestion, but a source close to the studios said, "This is a real venture."

If it is a negotiating tactic, it's pretty unusual, one source said.

"Unless they are sure they will ultimately prevail, anytime you go public it's hard to back off," the source said. "Maybe they got the vibe from Showtime that they were done negotiating."

Another point of confusion has been exactly which cable tier the new network will be targeting; some statements by Viacom CEO Philippe Dauman alluded that the new outlet won't necessarily be a pay TV channel as the press release suggested.

On Sunday, the venture partners hinted at a possible twist in the traditional pay cable business model that creates an approach different from that of HBO, Showtime and Starz.

Dauman said the focus is on "programmers controlling their own destiny" as he pointed out that pay TV deals currently "have a lot of restrictions" on new media and other usage of the content. He also hinted that the new service could make films available on-demand on the same day they hit the pay TV window.

One source said the venture has been looking for a business model that potentially gives cable and satellite TV partners some new benefits, like a mix of current business models for basic cable and premium networks. In such a scenario, the venture's channel could get revenue from carriage and/or subscriber fees plus advertising revenue. Viacom on Sunday had ruled out a traditional ad-supported basic cable network approach.

The new outlet would face a challenge in securing carriage. A source on the distribution side said the new channel could look expensive for cable and satellite firms at a time when many of them have day-and-date VOD trials running with the major studios and also can get a lot of product in the pay-per-view window.

"Any new channel has a hard time launching," one industry executive said. "It's not like (cable and satellite operators) are going to welcome them with open arms. They are going to have a really tough time."

Added another source, "I'm not sure another premium channel is needed at this point."

Comcast is a 20% investor in MGM, so one of the new venture partners seems to have an in with the largest U.S. cable operator. A Comcast spokeswoman declined comment on the venture and her firm's talks with it.

Things may be harder with Time Warner Cable for the new network as well as for Showtime, whose carriage deal with the cable company is said to be up next year.

Without the theatricals provided by the trio of studios in Showtime's arsenal, TWC could have negotiation leverage over the pay cable network.

While Showtime is closing on its personal best of 15 million subs and experiencing unprecedented buzz for its original programming, TWC could still be in a position to seek a reduction in what it pays for the channel. A financial hit would in turn bolster Time Warner pay TV rival HBO.

But CBS Corp. may have some leverage of its own. With CBS in his stable, the company potentially could yank the broadcast network from TWC to gain better deal terms, though it would be an unprecedented move because retransmission-consent battles typically center on ad-supported channels.

Pay cable channels took the news about a potential new competitor in stride, brushing off concerns that it could affect their business.

Starz executive vp programming Stephan Shelanski pointed out that the pay TV business model is in fact seeing an overall shift.

"The marketplace for movies is decreasing because movies are so much more readily accessible in so many different forms and versions before they even reach television," he said. "That being said, it's a double-edged sword since movies are a vital part of any pay TV network."

Wall Street on Monday also chimed in on the news of the new venture.

"We view the venture as a positive for Viacom," Bear Stearns analyst Spencer Wang said. Among other things, he believes that "the joint venture will pay Paramount for its studio output at rates potentially higher than what Showtime has been willing to commit to."

However, he also mentioned two key risks. First, while Viacom has affiliate marketing experience for its basic cable networks, that may not translate to the new business. "The premium business is highly transactional in nature and requires packaging, pricing and churn management/replacement expertise, which Viacom does not currently have," Wang said.

Second, he argued that the joint venture "may need to bulk up on other library content in order to fully program a 24-hour linear channel," assuming that the service will not be a VOD-only offering.

Miller Tabak analyst David Joyce said the venture is a negative for CBS Corp. and its Showtime unit but emphasized Showtime's declining reliance on film product. "Its theatrical premiere ratings have dropped 80% over the past seven years, while its original programming has strengthened," he said.

Georg Szalai reported from New York; Kimberly Nordyke reported from Los Angeles. Andrew Wallenstein in Los Angeles contributed to this report.
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