paidContent.org - Viacom And Time Warner Cable Play Chicken; Programmer To Pull Networks Over Fee Dispute

Subscribe to Time Warner (NYSE: TWX) Cable and have a kid with a Dora addiction? Get ready to pop in DVDs. Need your daily fix of The Daily Show? You'll have to go online or mobile unless TWC and Viacom (NYSE: VIA) call a halt to the latest round of cable chicken. That's the game content providers who want rate increases?or in the case of the just-settled Belo-Charter situation, retransmission payments?and cable operators play with viewers in the middle. In this case, Viacom says it's asking for an increase of less than 25 cents per month per sub for its 19 networks; TWC claims 13.3 million video subscribers.

Unless the two reach a last-minute deal, the programmer said Tuesday night it will pull its networks from TWC at midnight Wednesday when the current three-year agreement ends and launch an ad campaign featuring Dora, Kenny, Sponge Bob, Steve Colbert and others. That includes Nickelodeon, Comedy Central, MTV, and VH1. One source familiar with the situation calls it a "very low double-digit" increase but, as is usually the case with cable programming licenses, while Viacom is happy to toss around all kinds of stats in its statement, it's not offering the current fee.

More, including an update, after the jump

Meanwhile, TWC cites online access as a reason not to pay an increase. Spokesman Alex Dudley told the WSJ: "They are asking for huge increases and we don't know how we are supposed to sell this to our customers in this economy. ... Their content is no more valuable on the first of January than it is today, especially because they are putting most of their top-rated content on the Web for free." For good measure, Dudley suggests the ad downturn is the reason for the increase demand: "Their business model is failing, so they're trying to prop it up on our customers' backs." To which I have to say, poppycock. Cable nets routinely ask for price increases in good times and bad. Cable operators routinely say no until, usually, the two reach a settlement. That's how the game is played. Is pushing back this time TWC's way of helping its customers, as Dudley would have it, or of preserving its own cash flow as it prepares for a spin off from parent Time Warner? Is Viacom seeking a larger increase because of the economy? Doesn't really matter in the long run.

The timing may be particularly good for Viacom, since it dovetails with a TWC fee increase in New York City, LA and other markets. It also comes as people are relying more on entertainment at home. But don't underestimate the potential backlash from viewers irked by both players in this game of chicken, particularly at a time when people are looking for reasons to cut back. Will subscribers switch to satellite or Verizon's FiOS because they can't get Dora or Jon Stewart on Time Warner? Some might, particularly if it stretches out. Will some shrug and find something else to watch?or go to places where Viacom isn't paid by the sub? Yes. Will either company come out truly ahead? Doubtful.

Update: A little detail on what TWC pays for video programming, its highest expense: as of Sept. 30, TWC's video costs were up 7 percent year-over-year to $23.58 per sub compared with $21.94 and accounted for nearly half of the cable operator's expenses. According to the Q3 10-Q, programming costs rose both because of contractual increases and an increase in the number of subscribers getting expanded programming. In the 10-Q, TWC said it expects its profit margins will continue to narrow because of increased video programming expense: "Video programming costs represent a major component of TWC's expenses and are expected to continue to increase, reflecting programming rate increases on existing services, costs associated with retransmission consent agreements, subscriber growth and the expansion of service offerings. TWC expects that its video service margins as a percentage of video revenues will continue to decline over the next few years as increases in programming costs outpace growth in video revenues."