AWKWARD ZOMBIE

A dispute over programming fees could leave millions of viewers with static where their favorite channels had been.
By Meg James
December 31, 2008
Time Warner Cable subscribers could lose "SpongeBob SquarePants," "Dora the Explorer" and Jon Stewart at midnight tonight if the cable company fails to agree on a new contract with one of its biggest suppliers.

Viacom Inc. has threatened to pull its programming in a high-stakes showdown over pricing. Nearly 2 million homes in the Los Angeles area that are customers of Time Warner Cable Inc. could lose such Viacom channels as Nickelodeon, MTV, VH-1, Comedy Central, Spike, TV Land and BET.

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Viacom blamed the cable company for the stalemate.

"We've been attempting to negotiate in good faith but they seem to have taken it to the brink. Unfortunately, we are now at an impasse," said Philippe Dauman, chief executive of Viacom. The company's two-year contract with Time Warner, the nation's second-largest cable company, which provides service to 12.3 million homes, expires at midnight.

The two sides could still resolve their dispute today, allowing Time Warner customers on New Year's Day to see "Engaged & Underage: The Bridal Bowl" on MTV or an episode of "iCarly" called "iCarly Saves Television" on Nickelodeon.

On Tuesday, however, both sides appeared to be dug in to their positions, with Viacom placing newspaper ads and TV spots utilizing characters such as Dora the Explorer to encourage viewers to call Time Warner and complain. The media giant used similar tactics in a dispute with satellite broadcaster EchoStar Communications nearly five years ago.

"It rarely comes to this," said television consultant Larry Gerbrandt of Media Valuation Partners in Beverly Hills. "If they go off the air, no one wins. Customers will get upset at Time Warner and they could lose subscribers, and Viacom will lose important advertising revenue."

For its part, Time Warner said Viacom's demands for higher fees were "egregious," particularly at a time when the country is in the throes of an economic recession and subscribers are sensitive to costly cable bills.

"We are being put in an awkward spot," Time Warner Cable spokesman Alex Dudley said. "Advertising revenue stinks so they are looking to stick our customers for the difference. We have to hold the line for our customers."

SNL Kagan cable analyst Derek Baine said, "It's a really bad time to be squeezing people for a rate increase."

Viacom, however, said it was asking for only a modest increase of about 25 cents a month, or $3 a year, per subscriber for its package of 20 channels.

Time Warner countered that consenting to such an increase could encourage other cable networks also to demand higher fees, a scenario that could lead to $30 a year in increased charges for cable subscribers.

Viacom's strategy is complicated because ratings for its signature MTV, VH-1 and BET channels have been down this year, which means that advertising revenue has been lower than expected. Nickelodeon, meanwhile, has increased its audience with "Dora the Explorer," "SpongeBob SquarePants," "iCarly" and a stronger Nick at Night lineup.

"They are holding our customers hostage for a bunch of networks with sagging ratings and only one or two good channels," Dudley said.

There will probably be more such disputes in the new year as companies struggle amid a sour economy, predicted SNL Kagan's Baine. In recent months, a tussle between Time Warner and broadcaster LIN TV resulted in a monthlong blackout of 17 LIN television stations from Time Warner's cable system.

Viacom has gone to the mat before. In 2004, its cable channels disappeared from EchoStar's Dish Network for two days while the two sides quarreled over the terms of a new contract. And 12 years ago, the cable company Tele-Communications Inc. removed MTV and VH-1 from its lineup in a dispute with Viacom.

Viacom has been aggressive in its pricing, Baine said. Although far from the stratospheric levels of sports channel ESPN, which receives nearly $4 per cable subscriber per month, MTV collects about 32 cents a month per cable subscriber, Baine said. Nickelodeon fetches about 45 cents a month per subscriber.

Cable operators such as Time Warner are also miffed that Viacom and other companies have made some of their most popular programming available for free on the Internet. That's where many fans of Comedy Central's Stewart and Stephen Colbert catch their shows.

"They are not charging people more for that," Time Warner's Dudley said. "We will just tell our customers how to hook up their PCs to their television sets so they can watch it online for free."

Still, the move is not without risk for Time Warner, which has been facing increased competition from satellite television providers such as Dish Network and DirecTV and telephone companies such as Verizon and AT&T, which now offer television service.

"This is really about who is going to blink first," Gerbrandt said.

They are holding our customers hostage for a bunch of networks with sagging ratings and only one or two good channels