Time Warner Cable Threatens to Take Coveted Channel 2 Slot Away From CBS

Danny Feld/CBS/Warner Bros.
"Two and a Half Men" on CBS

As the tense talks over retransmission fees continue toward the Thursday deadline, the network says it will not make any deal that doesn’t maintain their position.

Tense negotiations on a new retransmission consent deal between Time Warner Cable and CBS Inc. continued Wednesday, but all indications are it is unlikely there will be an agreement before the 9 a.m. deadline Thursday because the parties are still so far apart on the value of the subscriber fees.

In the latest maneuver, Time Warner Cable says that if it blacks out CBS on its systems until a deal is made, it might auction off the coveted Channel 2 slot on its program lineup – making it permanently unavailable.

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Historically, the lower the slot on the lineup, the better. Typically, when a TV set is turned on, a viewer begins looking for something to watch at the default point of a channel lower on the lineup. 

A spokesperson for TWC told The Wall Street Journal, “If CBS goes dark, they likely lose their space on the (channel) lineup” permanently in the markets most affected by these talks – New York City, Los Angeles and Dallas/Fort Worth.

CBS appears to be taking that as an effort by TWC to gain leverage in the talks. In a statement to The Hollywood Reporter, a CBS spokesperson said, “CBS obviously won’t be making any deals in which we are required to change our channel position.”

On background, sources at TWC and CBS confirmed it does not look likely a deal will be reached before the current deadline expires. That means CBS stations, the CBS Sports Network and the Smithsonian Chanel may all go dark. There also is a chance CBS-owned pay TV service Showtime would go dark as well.

CBS has offered a short-term extension of the deadline while talks continue, but TWC has so far declined that offer. Sources say TWC wants a deal as soon as possible because each day that passes gets it closer to Sept. 5, when NFL football on CBS resumes. A blackout of the games would surely anger football fans who are TWC subscribers.

The next major sports event scheduled to air on CBS is the U.S. Open tennis tournament, which begins Aug. 26 and runs until Sept. 9.

David Banks, a Wall Street analyst with the firm RBC Capital Markets, said in an interview on CNBC that ultimately CBS has the stronger negotiating position because “typically in this business, it’s the content that wins … content has the leverage.”

During the interview, a graphic based on data from SNL Kagan showed that ESPN gets $5.54 per subscriber per month from cable operators while TNT gets $1.24, Fox News gets 94 cents and CBS gets 88 cents.

Banks said we have entered an era in which retrans fees are being “re-valued.”

“I think CBS has a great case,” said Banks, “because of their audience level and program investment.”

Banks said today's economics of media are such that advertising and subscriber revenue are needed to afford a menu of quality programming.

Another issue is the terms of the deal. In August 2010, CBS did a 10-year deal with Comcast on retransmission fees. The longer the deal, the more the cable distributor usually has to pay for that long-term peace of mind.

In the case of the Comcast deal, Banks said -- and company sources confirmed -- CBS would be asking for a lot more money if that was being negotiated today.

CBS Corp. CEO Leslie Moonves has said the company now wants full value for its content and thinks it's wrong that CBS gets higher ratings but is paid less than many other networks, such as TNT, which can’t match its offerings.

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At a Bank of America conference in September 2012, Moonves recalled the history of retransmission revenue. Three years ago, he said, CBS was receiving no retransmission cash. Five years ago, the network was paying its affiliates to carry CBS programming. In 2012, he estimated cable, satellite and telco TV distributors would pay CBS more than $250 million in retransmission fees.

Moonves at that time said CBS expects those fees to reach $1 billiion by 2016.

“People are realizing the value of our content,” Moonves said at the time. “They can’t live without the things we provide — the NFL, CSI, Two and a Half Men, Big Bang Theory, 60 Minutes. So our affiliates and our (cable)  partners realize they need to pay. The ecosystem has changed dramatically.”