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By Paul Kagan
What will eventually be known as the "Two-Day Blackout" was a curious little battle between Content and Distribution. Most people will remember the Viacom-EchoStar duel of March 8-10, 2004, as one in which the satellite carrier "surrendered" to the program provider. That's because the Dish Network apparently settled its litigation with Viacom, dating back to January, without any price or carriage concessions.
But wasn't it odd that Echo's wily Charlie Ergen picked a fight that he was bound to lose? Everyone seemed to agree that Viacom's pitch for pricing and forced carriage of its new networks was not worth scratching Sumner Redstone's whole stable, including CBS, and bringing down the wrath of Congress in an election year. So what was Charlie thinking?
As Sanford Bernstein analyst Craig Moffett said, "Ergen may be using the Viacom situation as an opportunistic 'bullhorn' in Congress, where broadcast and dish lobbyists are slugging toward a new version of the 1999 Satellite Home Viewer Improvement Act (SHVIA)." This is a satellite distant-signal bill, and maybe, this time, the alleged war of Content and Distribution was just a cover for old-fashioned, but critically important, rights to import signals into the home.
The way I see it, there should be no more logical partnership in media than that of cable/satellite operators and program networks. On a visceral level, distributors can live without certain channels, while the producers of the programs can't survive without carriage. But that seeming distributor advantage is offset by public pressure, led-especially in an election year-by heat-seeking government officials. After all the cable program disputes in recent years, it's clear that the parties have to bury the hatchet in a mutually agreeable contract rather than in each other's heads. If a standoff drags on, no one wins, and both sides know it.
Oh sure, the two are destined to always be in conflict. Pressure from programmers was locked in when the 1996 Telecom Act, backed by Reps. Billy Tauzin and Rick Boucher, endowed formerly optional channels like ESPN and CNN with new measures of carriage protection. It was an ironic compliment to cable that it pays for annually. But then, all of American humanity is locked into a vicious circle of price complaints: movie and stadium tickets, a gallon of gas, etc. People hate inflation, except when it raises their salary or the value of their house.
And program-cost whining has been compounded by politicians trading price controls for votes.
So, did Viacom and ESPN "win" in their tussles with EchoStar and Cox over single-digit rate increases? No, they tied, which is the way it ought to be in marketplace negotiation.
The real battle that's building steam is program carriage for new technology. Congressmen pushing for settlement of the "Two-Day Blackout" were worried about Dish subs missing out on March Madness basketball games. But what's coming next could be Multiplex Madness.
Who would have thought, that with all the money being invested in sophisticated set-tops, Internet access, VOD and telephony, the bloodiest battleground in media would still be how many channels people can access? Cable and satellite operators still spend a ton of time and money duking it out over carriage. The issue is escalating with the explosion of bandwidth-busting digital and high-definition channels. In the process, operators are once again required to prove that, when it comes to video expansion, this really isn't a free country. Despite that truth, in this 70th year since the first Communications Act of 1934, broadcast TV continues to be awash in free cash flow, and pay TV, with only marginal profits, is again in the spotlight for price-gouging.
Consumer lobbyists equate pay TV with gasoline: Citizens are entitled to plenty of it, but shouldn't be asked to pay too much. This year, government officials are once again calling for hearings on soaring prices at the pump, and putting pressure on higher prices at the pole. Which means that, in the future, we can expect to hear more periodic posturing on negotiations between Content and Distribution, and few words written about their truly symbiotic relationship.
Analyst Paul Kagan is an investor and money manager. He owns shares in Viacom and Cox. Information in his columns is not intended to be a recommendation to buy or sell securities.
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