The ongoing battle over programming costs may soon get downright ugly. Networks hit hard by the ad recession may try to salvage their near-term outlook by demanding license-fee increases as high as 20% in coming months. And operators are already threatening not to pay.

Both network-affiliate sales executives and the operators who square off against them at the negotiating table agree that 2002 could be a year marked by unusually flinty and contentious contract talks.

?When you have a network-affiliate sales person calling on an MSO during a noncontract-renewal year saying, ?Look, this is a terrible year for me; I'm going to be raising your rate,?? says Sundance Channel SVP-affiliate sales Thomas G. Christie, ?that operator is going to kick back hard. That is not a sales call I want to be on.? (Sundance Channel, which does not accept advertising, is immune from some of the ad-related pressures afflicting its programming brethren.)

Two sources familiar with the situation ? one of them a senior affiliate sales executive at a basic network ? said programmers are likely to demand increases in the 10% to 20% range.

Operators have already absorbed enormous increases in programming costs, as seen in their financial reports. For the nine months ended Sept. 30, 2001, Adelphia Communications lists its programming costs at $825 million, a 28% increase over 2000's $645 million over the first nine months. Over the same periods, Charter Communications spent $660 million, 25% more than $527 million; Cox Communications' costs were $722 million ? 15% more than $630 million a year earlier. Insight Communications spent $194 million during 2001 ? a 53% increase over $127 million during 2000. (Fees make up only part of an operator's programming cost; sometimes such expenses as system acquisitions are factored in as well.)

Against that backdrop, operators are unlikely to be swayed by programmers' hard-luck stories of the ad recession and layoffs.

?When I hear another network saying, ?Well, we had to lay off another 400 people today,? the first thing I think is, ?If you can lay those people off so easily now, then why did you hire them ? why did you need them before??? says Bob Gessner, president of Massillon Cable in Massillon, Ohio. ?Those people's salaries are being paid from the pockets of my customers, and I'm the one who catches the heat from it. I just don't think I can be that sympathetic.?

An affiliate-sales executive at a large network group says, ?Let's face it, if you're in a nonrenewal year and your ads are weak, the operator holds more cards than you do. And probably as many as he ever does.?

That means that some networks might be forced to strike a Faustian bargain: wheedle a fee increase out of operators now, but submit when the operator in turn demands to lock in that rate for several years. As a result, programmers would be forced to swallow those fees when the economy improved, no matter how much their own costs had risen in the meantime.

Of course, ad dollars are what the networks need right now, but the likelihood of imminent market improvement recedes with each passing week.

Spooked by war and terrorism fears, not to mention a sluggish equity market, advertisers are spending less. ?Not as many people want to buy ads,? says Brian Hunt, VP-affiliate ad sales and promotion, NBC Cable.

Media Buyer's Daily, a newsletter that, like Cable World, is published by Media Central, reported that during September, the number of advertisers buying cable dropped 7.2%, and the number of cable units sold fell 7.0%. Media Buyer's Daily also reported that through August cable ad revenues had risen a slight 4.5% for the year.

Enticing programming becomes much more important in an environment of such tight-fisted advertisers. ?Anybody in media right now has to have something that's pretty compelling,? says Jerry Machovina, EVP-media services of Yankee Entertainment and Sports Network, a New York Yankees-focused sports network launching in March. ?The days of 1998-'99 when everybody had a story to tell and people would spend money on it are gone.?

Injecting into this cash-poor environment a passel of needy programmers trying to raise rates as a fix spells trouble down the road, says Bob Rose, EVP-affiliate sales at Court TV. ?That's just a Band-Aid,? Rose says. ?Operators are smart businesspeople, and they view cash as fungible.?

According to Rose, operators who agree to a rate increase ?are never going to pay?more than a contract says.? So they will enjoy lower rates for a few years, knowing that, because the original contract probably provided the programmer incremental yearly increases, ?the programmer is going to have to come back and say that there's still a problem.?

Jed Palmer, president of Buss-Palmer Consulting, a content-evaluation and distribution consultancy, agrees that ?operators aren't particularly susceptible to pleas for generosity in terms of rate increases.? According to Palmer, ?the programmers don't have similar capital requirements [to operators'] as part of their normal expenses.?

Jack Olson, director-media services at Adelphia Communications, the Coudersport, Pa.-based MSO, agrees: ?We're hurting, too. We're losing in the same areas. I would frown on [rate increases].?

The operator-programmer struggle has grown increasingly testy in recent months. Many operators recoiled at the 20% annual rate hike by Disney-owned ESPN earlier this year and complained about the company's efforts to secure distribution for Playhouse Disney, an ad-free network aimed at small children.

Mike Russell, GM of Opp Cablevision in Opp, Ala., dropped Disney a year ago. ?It was a pay channel at one time, and they moved it to basic,? Russell says. With revenue-generating pay-TV fees supplanted by licensing fees that he had to pay, canceling the network was his only option.

Despite the contention that lives within the network-operator relationship, Buss-Palmer's Palmer points out that any negotiation between the two ?is like a labor contract. Neither side can live without the other.?

Knowing this, Adelphia's Olson says, ?To the extent that you have to protect the business, a concession might be made.?

Mavis Scanlon contributed to this report.

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