Programmers squeeze TV channel distributors

Channel blackouts, higher consumer fees result

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LOS ANGELES -- Channel blackouts such as the one that resulted from the recent spat between Viacom and DirecTV have become far more common in the past three years. Consumers can thank the changing dynamics of the entertainment industry.

Media companies such as Viacom and Disney have become steadily more profitable since the gloom of the recession lifted in early 2010. But the cable and satellite providers that pay to carry their channels have seen profitability virtually stagnate as they fight each other for subscribers. The squeeze has prompted distributors such as Dish and DirecTV to revolt against higher programming costs. Consumers are left in the crossfire.

DirecTV subscribers haven't been able to view Viacom channels such as Comedy Central, MTV, Nickelodeon and VH1 since Tuesday, when the two companies failed to reach a contract agreement over content fees. The industry's cost pressures mean such fights are likely to continue.

The rising number of disputes is largely the result of the stagnant market for pay television. There aren't many new households being formed in the sluggish economy, and those who want to pay for television already do. Some 101 million U.S. households subscribe to cable or satellite service. That's about 87 percent of homes, a proportion that has remained unchanged since 2009, according to Leichtman Research Group, which studies media and entertainment.

TV distributors pay media companies a few cents per channel per subscriber each month. In turn, they try to sell packages of channels for more. As costs for those channels rise, so do customers' monthly service bills, but not always by enough to offset the increasing fees cable and satellite providers are paying. In addition, distributors spend money on promotions to woo subscribers from competitors. As a result, some companies' expenses are rising faster than revenue.

That has prompted cable and satellite service providers to fight against cost increases, even when it means blacking out channels. Satellite TV companies are in an even tighter squeeze than cable companies because they can't make up for costs by providing Internet or phone service.

In December 2009, Major cable- and satellite-TV distributors kept 15 cents of profit after subtracting operating expenses from every dollar of services they sold. That grew to 19 cents in September. But since, cable and satellite companies haven't found a way to wring more profitability.

Meanwhile, prominent media companies that produce and bankroll the shows have kept expanding their profit share. They grew operating profits from 16 cents to 19 cents per dollar in the same period. That climbed to 20 cents per dollar by March.

In the first six and a half months of this year, 22 fee disputes involving the price of broadcast TV signals have caused channel blackouts, according to the American TV Alliance. That's up from 15 blackouts in all of 2011. There were just four in 2010.

Dish dropped AMC channels on July 1, two weeks ahead of the premiere of "Breaking Bad." DirecTV dropped more than a dozen Viacom channels on July 10. Time Warner gave up on a Fox Sports channel covering the San Diego Padres in April, and on July 9, it let 15 Hearst TV stations go dark, complaining of a four-fold fee hike demand.

Distributors say they must hold the line on their biggest expense -- programming-- even if they risk having customers defect.

"I don't think the industry can sustain this kind of behavior," said DirecTV's Executive Vice President of Strategy Derek Chang. "Ultimately, it'll drive costs up to the end user."

Amid the war of words, one thing is clear: the price of television is going up.

In April and May, 1,369 Americans who were surveyed by the Leichtman Research Group reported that their monthly TV bill rose an average of 7 percent from a year ago to $78.63. That's largely in line with annual single-digit percentage increases historically.

What's different for distributors lately is that they also have to pay for broadcast TV station signals, which they used to get for free in exchange for carrying upstart new channels. In recent years, broadcasters such as CBS have demanded cash from distributors for broadcast signals, even though consumers who set up an antenna could get them over the air at no charge.

Such retransmission fees are expected to double industrywide from $1.8 billion this year to $3.6 billion in 2017, according to research firm SNL Kagan.

"That's an expense that really didn't exist five or 10 years ago," says Leichtman Research Group's president Bruce Leichtman. "That's putting the biggest stress on the system."