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Cable Technology Feature Article

March 08, 2013

Cablevision's $1B Allegation in Viacom Suit Hauls A La Carte TV in for an Airing

By Tara Seals, TMCnet Contributor

Pay-TV distributors have long argued that content bundling practices force them to take channels they don’t want and can’t monetize in order to gain access to top-rated cable nets. Cablevision Systems (News - Alert) is taking that grumbling to the next level with an antitrust lawsuit against Viacom, accusing the media giant of demanding a $1 billion penalty if the MSO did not agree to Cablevision to carry and pay for 14 unpopular networks, such as Palladia, MTV Hits and VH1 Classic, along with must-have networks such as Nickelodeon, MTV and Comedy Central.

The outcome could have serious ramifications for the way TV packages are built and paid for; in fact, some industry watchers expect the dispute to put the idea of true al la carte channel bundling into laser-like focus as the industry considers the next generation of television service.

The two companies reached a renewed carriage deal in December, but the cableco is essentially saying now that it was suckered into signing it. Viacom, it alleges, abused its market power to coerce Cablevision into a deal by threatening to impose financial penalties (that alleged $1 billion) unless Cablevision complied with Viacom's demands to take the ancillary networks. If the MSO didn’t pony up to pay for the niche networks, then there would be not MTV or Nick at Night on offer either.

The suit, parts of which were just made public, alleges that the increases for Viacom alone over the contractual period “exceeded Cablevision’s entire 2013 budget for programming.”

Pshaw said Viacom, “Cablevision is crying foul over a standard business practice that expands choice and lowers cost for consumers – a practice they use extensively to sell their own services,” Viacom said by way of the company blog. “Cablevision received significant discount on a package of networks that account for nearly 20 percent of the total viewing audience. Now they want the lower price without the obligation to offer our networks to their customers. For Cablevision it’s ‘do as we say and not as we do’ – an arrogant approach all too familiar to its customers.”

Cablevision's complaint asserts that Viacom engaged in a "per se" illegal tying arrangement in violation of the federal antitrust laws, as well as unlawful "block booking," which is a form of tying that conditions the sale of a package of rights on the purchaser's taking of other rights. The cableco also said that Viacom's conduct also violates the Donnelly Act in New York State Law, which parallels federal antitrust laws.

"Viacom's conduct harms Cablevision and its customers, and impairs competition by making Cablevision pay for and carry networks that many subscribers do not want to watch, while other networks are excluded from distribution, preventing Cablevision from being able to differentiate its services and harming subscribers," the suit said.

"The manner in which Viacom sells its programming is illegal, anti-consumer and wrong," Cablevision added in a statement. "Viacom effectively forces Cablevision's customers to pay for and receive little-watched channels in order to get the channels they actually want. Viacom's abuse of its market power is not only illegal, but also prevents Cablevision from delivering the programming that its customers want and that competes with Viacom's less popular channels."

Cablevision wants triple damages and legal fees, and wants its December 2012 carriage agreement with Viacom voided. It is also seeking a permanent injunction barring Viacom from conditioning carriage of any or all of its core networks, which include MTV, Nickelodeon, VH1, Spike, TV Land, Comedy Central and BET.

Viacom, however, appears unperturbed as to legal ramifications. "Many distributors take advantage of these win-win and pro-consumer arrangements," said Viacom at the time of the filing. "Reflecting the highly competitive cable programming business, these arrangements have been upheld by a number of federal courts and on appeal."

Others agree that Cablevision may not have a case. "The truth is they do not typically force multichannel operators to take the whole bundle, they just give them discounts when they take multiple networks and more discounts when they hit certain penetration hurdles," SNL Kagan analyst Derek Baine said. "That's how they have always gotten around this argument in the past."

Echoing Viacom’s sentiments, SNL Financial (News - Alert) analyst Sarah Barry pointed out in a blog that the precedent does not bode well. The Brantley v. NBC Universal suit saw cable and satellite subscribers filing a class-action suit against NBCUniversal, Viacom, Disney, FOX, Time Warner, Time Warner Cable, Comcast (News - Alert), Cox Communications, DIRECTV and Cablevision, arguing that the programmers' practice of selling multichannel cable packages to distributors violated antitrust law. The subscribers said there were two classes of channels: "must-have" networks and less desirable, low-demand channels. And in order to carry the must-haves, distributors must also carry the low-demand channels. "As a consequence ... distributors can offer consumers only prepackaged tiers of cable channels which consist of each programmer's entire offering of channels," the complaint said.

The appeals court said that while the subscribers may have felt that they were injured by the tying, they did not prove injury to competition.

Nonetheless, Cablevision is confident that the pro-consumer aspects of labeling bundling as anticompetitive may hold sway with the court.

"Without the 'take it or leave it' requirements of bundled programming packages at a wholesale level, cable companies could tailor smaller and lower-priced packages that could offer flexibility and have great appeal to specific interests and audiences," said Charlie Schueler, spokesman for Cablevision, told the Wall Street Journal.

He’s referring of course to the TV Nirvana known as a la carte bundling. Distributors can package up niche offerings for a long-tail approach to the market, and consumers could simply pick and choose which channels they want, applying per-channel pricing to build their own cable tier.

That radical shift in the way the TV business works would be rather costly for Big Media, which draws a sizable chunk of profit from carriage fees from distributors, often offsetting fluctuations in advertising revenue. The WSJ, citing Kagan stats, pointed out that Disney (News - Alert) draws more than $10 billion in fees, mostly thanks to ESPN, the most expensive network there is.  Disney’s haul is about a third of the $31.6 billion expected to be generated industry-wide in 2013 from carriage fees, but other media companies rely on them as well. Viacom’s affiliate revenue went up 4 percent in the fourth quarter, for instance, even as ad revenue and overall profit declined.

And that means that channel pricing will actually go up in an a la carte model. "A la carte—maybe a little counter-intuitively—raises prices and reduces choice because it increases the costs," said Mike Fricklas, general counsel at Viacom, told the WSJ. “Now you have to worry about whether they are subscribing and watching." He said a lot of money would be siphoned out of programming investment and into marketing dollars because there wouldn't be assured distribution.”

The jury is still out—literally—on the issue, but some are already experimenting with a la carte-ish bundles. Verizon FiOS for instance recently launched a sports-free package—stripping out the most expensive portions of the content costs for the IPTV (News - Alert) provider in order to pass along a discount to viewers.

The Select HD package service saves subscribers around 15 percent per month: it goes for $49.99 per month (compared to Verizon's standard $64.99 Prime HD package). The service's 140 channels includes local broadcast TV networks and 19 of the top 30 basic-tier cable networks, including Disney, Nick, Cartoon Network, CNN, MSNBC, The Weather Channel, The Discovery Channel, USA, TBS, AMC, FX, BET, Bravo, Food Network, HGTV and TLC. It also includes 30-plus HD channels and video-on-demand (VOD).

"Sports is not everyone's cup of tea," said Verizon spokesperson Bill Kula, in a blog post. "In fact, we have many customers for whom watching sports is akin to me watching a fashion or dance program (not fun for me at least)."

He added, "We understand that many households are on a tight budget, and we want to help make sure you aren't paying for something you think you don't need,” Kula said.

Edited by Rachel Ramsey

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