Retransmission Consent and Other Federal Rules Affecting Programmer-Distributor Negotiations: Issues for Congress

Congressional research reportJul 9, 2007

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Order Code RL34078

Retransmission Consent and Other Federal Rules

Affecting Programmer-Distributor Negotiations:

Issues for Congress

July 9, 2007

Charles B. Goldfarb

Specialist in Industrial Organization and Telecommunications Policy

Resources, Science, and Industry Division

Retransmission Consent and Other Federal Rules

Affecting Programmer-Distributor Negotiations:

Issues for Congress

Summary

When conflicts arise between a programmer (a broadcaster or a cable network

owner) and a multichannel video programming distributor (MVPD, usually a cable

or satellite operator) about the carriage of particular video programming, the price for

that programming, or the tier on which the programming is to be offered to the end

user, many consumers can be affected. Recently there have been several incidents

in which a negotiating impasse between a programmer and a distributor has resulted

in the programmer refusing to allow the MVPD to carry, or the MVPD choosing not

to carry, a program network. While contractual terms, conditions, and rates are

determined by private negotiations, they are strongly affected by a number of federal

statutory provisions and regulatory requirements, including the statutory

retransmission consent and must-carry rules, the FCC program exclusivity rules,

local-into-local and distant signal provisions in satellite laws, copyright law

provisions relating to cable and satellite, statutory commercial leased access

requirements and program carriage and nondiscriminatory access provisions, and the

FCC’s media ownership rules.

The recent increase in negotiating impasses appears to be the result of structural

market changes that have given programmers with “must-have” programming much

greater leverage, particularly when they are negotiating with small distributors.

Competitive entry in distribution — almost all cable companies now face

competition from two satellite companies, and are beginning to face competition

from telephone companies — has emboldened programmers with popular

programming to demand cash payment from distributors for the right to carry that

programming. In particular, local broadcasters increasingly are using the statutory

retransmission consent requirement to demand cash payment from small cable

companies who could lose subscribers to the satellite providers and new telephone

entrants if they reach an impasse with the broadcaster and can no longer carry the

local broadcast signals. In the past, the cable companies were the only MVPD in a

market and could use that countervailing power to refuse to pay cash for carriage.

Thus, ironically, competition in the distribution market may be resulting in higher

programming costs that MVPDs may have to pass on to their subscribers.

The small cable companies have argued that some of the existing statutory and

regulatory requirements were implemented at a time when cable was a monopoly and

were intended to protect broadcasters. Now that the market dynamics have changed,

they argue, some of these rules should be changed to allow for more even-handed

negotiations. At the same time, however, as a result of consolidation and clustering

in the cable industry there are a few very large cable companies, which primarily

serve major markets, as well as the two national satellite operators, that appear to

have sufficient market strength to be able to withstand many of the demands of the

programmers with must-have programming and to place small independent

programmers at a negotiating disadvantage. This report will be updated as warranted.

For a condensed version of this report, see CRS Report RL34079.

Contents

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Market Changes Affecting the Programmer-Distributor Relationship . . . . . . . . 11

More Distribution Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Consolidation and Clustering of Cable Operators . . . . . . . . . . . . . . . . . . . . 13

Negotiating with a cable program network . . . . . . . . . . . . . . . . . . . . . 18

Negotiating with a national broadcast network . . . . . . . . . . . . . . . . . . 19

Negotiating with a local broadcast station or non-network

broadcast group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

More Program Networks/Fragmented Audiences . . . . . . . . . . . . . . . . . . . . 20

Cable System Revenue is Growing From High Speed Internet Access

and Telephone Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Specific Examples of Programmer-Distributor Conflicts . . . . . . . . . . . . . . . . . . 31

Nexstar: The First Broadcaster to Aggressively Seek Cash Payments

for Retransmission Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

CBS: The Only Major Broadcast Network to Aggressively Seek Cash

Payments for Retransmission Consent . . . . . . . . . . . . . . . . . . . . . . . . . 35

DISH Network/Lifetime/Hearst-Argyle: An Example of the Complexity

of Programmer-Distributor Negotiations . . . . . . . . . . . . . . . . . . . . . . . 36

Sinclair’s Negotiations with Various MVPDs: A Case Study

of Factors Affecting Negotiating Strength . . . . . . . . . . . . . . . . . . . . . . 40

Sinclair-Mediacom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Sinclair-Suddenlink . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Sinclair-Time Warner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Sinclair-Comcast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Sinclair-Charter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Measuring Retransmission Consent Revenues . . . . . . . . . . . . . . . . . . 53

Time Warner: A Large Cable Company Demands Cash Payments

from Broadcasters to Retransmit Their Non-Primary Signals . . . . . . . 54

Issues for Congress: Proposals for Statutory and Regulatory Change . . . . . . . . . 56

Economic Factors Relevant to Analysis of the Proposals for Statutory

and Regulatory Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Specific Proposals to Modify Current Statutes and Regulations . . . . . . . . . 60

Proposal: Allow the importation of distant signals when a

retransmission consent impasse develops . . . . . . . . . . . . . . . . . . 60

Proposal: Require broadcasters to publish rate cards that would

apply to all MVPDs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Proposal: Require parties to submit to binding arbitration to resolve

leased access, program carriage, or retransmission

consent disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Proposal: Strengthen the FCC test for what constitutes

“good faith” retransmission consent negotiations . . . . . . . . . . . . 64

Proposal: Prohibit tying carriage of popular programming

to carriage of less popular programming . . . . . . . . . . . . . . . . . . . 66

Proposal: Require programmers to offer their broadcast and

cable networks to distributors on an à la carte basis . . . . . . . . . . 67

Proposal: Prohibit programmers from requiring their networks

to be placed on the expanded basic service tier . . . . . . . . . . . . . . 69

Proposal: Prohibit the ownership or control of more than one

television station in a market or prohibit a “duopoly”

owner from tying retransmission consent for one

station to another . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Proposal: Place set-top boxes in customer premises that pick up

local broadcast station signals off the air without

requiring MVPDs to retransmit

broadcast signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Proposal: Close the “terrestrial loophole” exception to the

requirement for nondiscriminatory access to

programming in which a cable operator

has an attributable interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Proposal: Clarify the definition of a regional sports network . . . . . . . 73

List of Tables

Table 1. Consolidation in the National Market for the Purchase

of Video Programming (Percentage of

MVPD Subscribers), 2002-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Table 2. The 25 Largest Cable Operators as of December 2006 . . . . . . . . . . . . . 15

Table 3. Cable Television System Clusters Serving More Than 100,000

Subscribers, as of December 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Table 4. Cable Program Networks with the Largest Number of Subscribers,

as of December 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Table 5. Nielsen Data on Total Television Households, Time Spent

Viewing Per Household, and the Average Number of Video

Channels Received Per Household, 1985-2006 . . . . . . . . . . . . . . . . . . . . . . 21

Table 6. Estimated Share of U.S. Television Home Set Usage by Program

Source (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Table 7. The Average Weekly Cumulative Audience Reach of the Largest

Broadcast and Cable Program Networks, First Quarter 2007 . . . . . . . . . . . 24

Table 8. The Individual Television Programs with the Largest Audience

Ratings, 2005-2006 Television Season . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Table 9. The Advertiser-Supported Cable Networks with the Highest

Average License Fees Per Subscriber Per Month, 2005 . . . . . . . . . . . . . . . 27

Table 10. Cable Company Revenues, by Service, 1996-2005, in Millions

of Dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Table 11. Estimated Number of Television Program Sources Viewed

per Adult, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Retransmission Consent and

Other Federal Rules Affecting

Programmer-Distributor Negotiations:

Issues for Congress

Overview

Virtually all U.S. households have a television and almost 86% of these

television households get their video programming by subscribing to a multichannel

video programming distributor (MVPD) — in most cases a cable operator or a direct

broadcast satellite (DBS) operator — rather than relying upon “free” over-the-air

broadcast television signals.1 As a result, when conflicts arise between programmers

and MVPDs about the carriage of particular video programming, the price for that

programming, or the tier on which the programming is to be offered to the end user

(for example, on a basic or premium tier, on a “top 60” or a “top 120” tier, or on an

analog or digital tier), many consumers can be affected.

Recently, there have been several incidents in which a negotiating impasse

between a programmer and an MVPD has resulted in the programmer refusing to

allow the MVPD to carry, or the MVPD choosing not to carry, a program network,

forcing the MVPD’s subscribers to choose between foregoing that program network

or switching to a competing MVPD that does carry the program network.2 There also

have been a number of situations in which programmer-distributor negotiations have

been resolved without any disruption in program carriage, but only after the

negotiations played out in public, with subscribers and public officials being warned

of the danger of losing access to particular programming and being encouraged by

In the Matter of Annual Assessment of the Status of Competition in the Market for the

Delivery of Video Programming, Federal Communications Commission, MB Docket No.

05-255, Twelfth Annual Report, adopted February 10, 2006, released March 3, 2006, at

para. 8. As of June 2005, there were 109.6 million television households, of which

approximately 94.2 million subscribed to an MVPD service. Of the latter, 69.4% received

video programming from a franchised cable operator and 27.7% from a DBS operator.

Even where the impasse involves broadcast programming that is transmitted over the air,

most households that subscribe to an MVPD no longer have an antenna and therefore at a

minimum would have to obtain and install an antenna to continue to receive the

programming. In these cases, the MVPD typically has offered to provide a free “rabbitears” antenna, although in many cases a higher quality rooftop antenna is needed to get good

over the air reception, and some households cannot get decent reception even with a rooftop

antenna. Indeed, that inability to receive broadcast signals over the air was the original

impetus for cable television, which was then called community antenna television, or

CATV.

CRS-2

each side to contact the other side in order to place pressure on them to compromise.

Often these public negotiations have occurred when the programming at risk included

upcoming sports events that some subscribers placed a high value on viewing.3 Also,

there have been incidents in which an MVPD has announced a price increase to

subscribers shortly after the conclusion of contentious negotiations with a

programmer, with the MVPD attributing the price increase to higher programming

costs, and the programmer denying the causal connection.

Although the contractual terms, conditions, and rates at which content providers

make their content available to programmers, and at which programmers make their

programming available to distributors, are determined by private negotiations, there

are a number of federal statutory provisions and regulatory requirements that strongly

affect those negotiations.4 These include:

the retransmission consent and must-carry rules, which govern

the carriage of television broadcast signals by cable operators.5

Under these rules, every three years each local commercial broadcast

television station must choose between (1) negotiating a

retransmission consent agreement with each cable system operating

in its service area, whereby if agreement is reached the broadcaster

is compensated6 by the cable system for the right to carry the

broadcast signal, and if agreement is not reached, the cable system

is not allowed to carry the signal; or (2) requiring each cable system

operating in its service area to carry its signal, but receiving no

compensation for such carriage.7 With this mandatory election,

See, for example, Peter Grant and Brooks Barnes, “Channel Change — Television’s

Power Shift: Cable Pays for ‘Free’ Shows; Broadcasters Want Cash to Carry Their Signal;

Super Bowl is Hostage,” Wall Street Journal, February 5, 2007, at p. A1.

For a detailed discussion of many of these statutory provisions and regulatory

requirements, see Federal Communications Commission, Retransmission Consent and

Exclusivity Rules: Report to Congress Pursuant to Section 208 of the Satellite Home Viewer

Extension and Reauthorization Act of 2004 (FCC Retransmission Consent Report),

September 8, 2005, available at [http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC260936A1.pdf], viewed on June 28, 2007.

The Cable Television Consumer Protection and Competition Act of 1992 (P.L. 102-385)

established new rules, placed into Sections 325 and 614 of the Communications Act, as

amended (47 U.S.C. 534). These rules apply to all cable operators. AT&T has claimed that,

due to the technology employed, its MVPD service is an information service rather than a

cable service, and thus not subject to cable rules. It views the retransmission consent rules

as part of the copyright licensing framework and has agreed to negotiate for retransmission

consent, but it views the must-carry rules as part of the cable regulatory regime that does not

apply to its service. This is a controversial position.

Compensation can take the form of cash payments, the MVPD’s purchase of advertising

time on the broadcast station, the broadcaster being given free advertising time on the

MVPD’s system, the MVPD’s carriage (and tier placement) of other program networks

owned by the broadcaster, or some combination of these.

Section 614(b)(3)(A) of the Communications Act states that “A cable operator shall carry

(continued...)

CRS-3

broadcasters with popular programming that are confident the local

cable systems will want to carry that programming can make the

retransmission consent election and be assured compensation for

such carriage, and broadcasters with less popular programming that

the local cable systems might otherwise not choose to carry can

make the must carry election and be assured that their signal will be

carried by all local cable systems. In many cases local broadcasters

that are affiliated with a national broadcast network and have elected

the retransmission consent option have (as part of their affiliation

agreement) assigned to the network the right to negotiate the terms

of retransmission consent.

a number of Federal Communications Commission (FCC or

Commission) exclusivity rules8 that give local broadcasters the

exclusive right to distribute certain programming (the network

program non-duplication rules9 and syndicated exclusivity protection

rules10) or that protect a sports team’s or sports league’s distribution

(...continued)

in its entirety, on the cable system of that operator, the primary video ... transmission of each

of the local commercial television stations carried on the cable system....” As broadcasters

have deployed digital technology, they have been able to use their new digital spectrum to

transmit multiple video streams, not just a single stream, and/or to transmit their

programming in high-definition as well as standard format. The broadcasters have sought

an interpretation of the must-carry rule that would require cable operators to carry both their

analog and their digital transmissions and, where they are offering multiple video streams

or high-definition transmissions, that would require cable operators to carry their multiple

streams and high-definition transmissions. To date, the FCC has not adopted that

interpretation, but it is currently under discussion. As a result, carriage of these additional

video transmissions has been subject to retransmission consent negotiations, and is not

mandatory on the part of cable or satellite operators.

These rules are found in Part 76 of the FCC’s rules. For a description of these rules, see

the FCC Retransmission Consent Report, at footnote 8 and at paras. 17-30.

Commercial television station licensees are entitled to protect the network programming

they have contracted for by exercising non-duplication rights against more distant television

broadcast stations carried on a local cable television system that serves more than 1,000

subscribers. Commercial broadcast stations may assert these non-duplication rights

regardless of whether or not their signals are being transmitted by the local cable system and

regardless of when, or if, the network programming is scheduled to be broadcast. Generally,

the zone of protection for such programming cannot exceed 35 miles for stations licensed

to a community in the Commission’s list of top 100 television markets or 55 miles for

stations licensed to communities in smaller television markets. In addition, a cable operator

does not have to delete the network programming of any station which the Commission has

previously recognized as significantly viewed in the cable community.

With respect to non-network programming, cable systems that serve at least 1,000

subscribers may be required, upon proper notification, to provide syndicated protection to

broadcasters who have contracted with program suppliers for exclusive exhibition rights to

certain programs within specific geographic areas, whether or not the cable system affected

is carrying the station requesting this protection. However, no cable system is required to

(continued...)

CRS-4

rights to a sporting event taking place in a local market (the sports

programming blackout rules11). These rules, which tend to mirror

the terms found in most network-affiliate contracts and stationsyndicator contracts, limit the ability of a cable operator that has not

been able to reach a retransmission consent negotiation with a local

broadcaster that transmits network or syndicated programming to

import the same programming from a more distant broadcaster.

the local-into-local and distant signal provisions in various

statutes that govern the carriage of television broadcast signals by

satellite operators,12 which define which households are eligible to

receive distant broadcast network signals and local network signals

and include several copyright provisions. Under the Satellite Home

Viewer Act, direct-to-home satellite providers were granted a

compulsory copyright license to retransmit television signals of

distant networks stations to unserved households and to retransmit

signals of certain non-network broadcast stations (called

“superstations”) to any household. The Satellite Home Viewer

Improvement Act created a new statutory copyright license for

satellite carriage of stations to any subscriber within a station’s local

market, without distinction between network and non-network

signals or served or unserved households.

(...continued)

delete a program broadcast by a station that either is significantly viewed or places a Grade

B or better contour over the community of the cable system.

A cable system located within 35 miles of the city of license of a broadcast station where

a sporting event is taking place may not carry the live television broadcast of the sporting

event on its system if the event is not available live on a local television broadcast station,

if the holder of the broadcast rights to the event, or its agent, requests such a blackout. The

holder of the rights is responsible for notifying the cable operator of its request for program

deletion at least the Monday preceding the calendar week during which the deletion is

desired. If no television broadcast station is licensed to the community in which the sports

event is taking place, the 35-mile blackout zone extends from the broadcast station’s

licensed community with which the sports event or team is identified. If the event or local

team is not identified with any particular community (for instance, the New England

Patriots), the 35-mile blackout zone extends from the community nearest the sports event

which has a licensed broadcast station. The sports blackout rule does not apply to cable

television systems serving less than 1,000 subscribers, nor does it require deletion of a sports

event on a broadcast station’s signal that was carried by a cable system prior to March 31,

1972. The rule does not apply to sports programming carried on non-broadcast program

distribution services such as ESPN. These services, however, may be subject to private

contractual blackout restrictions.

Satellite Home Viewer Act of 1988 (SHVA), P.L. 100-667, 102 Stat. 3935, Title II;

Satellite Home Viewer Improvement Act of 1999 (SHVIA), P.L. 106-113, 113 Stat. 1501,

1501A-526 to 1501A-545; and Satellite Home Viewer Extension and Reauthorization Act

of 2004 (SHVERA), P.L. 108-447, 118 Stat. 2809. For a discussion of these rules governing

satellite carriage of local and distant signals, see CRS Report RS22175, Satellite Television:

Provisions in SHVERA Affecting Eligibility for Distant and Local Analog Network Signals,

by Julie Jennings.

CRS-5

cable-related statutory copyright provisions, which set specific

terms, conditions, and rates, including mandatory licenses, for

certain uses of programming.13 For example, cable systems enjoy a

royalty-free permanent compulsory copyright license — that is, do

not have to pay copyright fees — for the carriage of broadcast

signals of stations located in their local market areas (called

“designated market areas” or DMAs). But cable systems are

required to pay royalties under a congressionally granted compulsory

located outside the DMA within which the cable system is located.

The royalty-free license extends to the secondary transmission of

out-of-DMA broadcast stations, however, if it can be shown that

those out-of-DMA signals are “significantly viewed” by those

households within the cable system’s service area that only receive

their television signals over-the-air.

the commercial leased access requirements in section 612 of the

Communications Act, which require a cable operator to set aside

channel capacity for commercial use by video programmers

unaffiliated with the operator.14

Communications Act of 1934, as amended, Sec. 612 (47 U.S.C. § 532). This statutory

framework for commercial leased access was first established by the Cable Communictions

Policy Act of 1984 (P.L 98-549, 98 Stat. 2779). Cable operators with fewer than 36

channels must set aside channels for commercial use only if required to do so by a franchise

agreement in effect as of the enactment of Sec. 612. Operators with 36 to 54 activated

channels must set aside 10% of those channels not otherwise required for use or prohibited

from use by federal law or regulation. Operators with 55 to 100 activated channels must set

aside 15% of those channels not otherwise required for use or prohibited from use by federal

law or regulation. Cable operators with more than 100 activated channels must designate

15% of such channels for commercial use. The Cable Television Consumer Protection and

Competition Act of 1992 (P.L. 102-385) established new rules, modifying Sec. 612, that

required the FCC to (a) determine the maximum reasonable rates that a cable operator may

establish for commercial use of designated channel capacity; (b) establish reasonable terms

and conditions for such use, including those for billing and collections; and (c) establish

procedures for the expedited resolution of disputes concerning rates or carriage. In

implementing the statutory directive to determine maximum reasonable rates for leased

access, the Commission adopted a maximum rate formula for full-time carriage on

programming tiers and for à la carte services, and a prorated rate for part-time programming.

One condition of the FCC’s approval of the transfer of licenses of the bankrupt Adelphia

Communications Corporation to Comcast Corporation and Time Warner Inc., is that if an

unaffiliated programming network is unable to reach an agreement pursuant to the

Commission’s commercial leased access rules with Comcast or Time Warner, that network

may elect commercial arbitration of the dispute, where the arbitrator would be directed to

resolve the dispute using the rate formula specified in the Commission’s rules. Another

condition allows an unaffiliated regional sports network that is unable to reach a carriage

agreement with Comcast or Time Warner to elect commercial arbitration of the dispute. See

In the Matter of Applications for Consent to the Assignment and/or Transfer of Control of

Licenses: Adelphia Communications Corporation (and subsidiaries, debtors-in-possession),

(continued...)

CRS-6

the program carriage provisions in section 616 of the

Communications Act directing the FCC to establish regulations

governing program carriage agreements and related practices

between cable operators or other MVPDs and programmers that

would prevent an MVPD from requiring a financial interest in a

program service as a condition for carriage, from coercing a

programmer to grant exclusive carriage rights, or from

discriminating against an unaffiliated programmer in a fashion that

unreasonably restrains the ability of that programmer to compete,

when the programming is distributed over satellite.15

the requirements for nondiscriminatory access to programming

in which a cable operator has an attributable interest in section

628 of the Communications Act, which directs the FCC to establish

rules to prevent a vertically integrated cable operator from

discriminating in the prices, terms, and conditions at which it makes

its programming available to non-affiliated MVPDs or have

exclusive access to the programming in which it has an attributable

interest.16 But these prohibitions do not hold if the vertically

integrated company’s programming is distributed over terrestrial

facilities (for example, over broadband lines), an exception that

frequently applies to regional sports networks and potentially could

(...continued)

Assignors, to Time Warner Cable Inc. (subsidiaries), Assignees; Adelphia Communications

Corporation (and subsidiaries, debtors-in-possession), Assignors and Transferors, to

Comcast Corporation (subsidiaries), Assignees and Transferees; Comcast Corporation,

Transferor, to Time Warner Inc., Transferee; Time Warner Inc., Transferor, to Comcast

Corporation, Transferee, Memorandum Opinion and Order, adopted July 13, 2006, released

July 21, 2006, at paras. 109 and 181.

Communications Act of 1934, as amended, Sec. 616 (47 U.S.C. § 536).

Communications Act of 1934, as amended, Sec. 628 (47 U.S.C. § 548). When

NewsCorp, which owns many cable networks, acquired from Hughes Electronic Corporation

a large ownership interest in DirecTV, thus creating a vertically integrated programmerdistributor entity, the FCC conditioned the transfer of the spectrum licenses upon a

agreement to abide by the same non-discrimination requirements, even though the new

company would not have been so required under the existing statutory provisions. (In the

Matter of General Motors Corporation and Hughes Electronic Corporation, Transferors,

and the New Corporation Limited, Transferee, for Authority to Transfer Control,

Memorandum Opinion and Order, FCC 03-330, Appendix F, 2004.) The FCC imposed a

similar condition on the transfer of the licenses of the bankrupt Adelphia Communications

Corporation to Time Warner and Comcast. See In the Matter of Applications for Consent

to the Assignment and/or Transfer of Control of Licenses: Adelphia Communications

Corporation (and subsidiaries, debtors-in-possession), Assignors, to Time Warner Cable

Inc. (subsidiaries), Assignees; Adelphia Communications Corporation (and subsidiaries,

debtors-in-possession), Assignors and Transferors, to Comcast Corporation (subsidiaries),

Assignees and Transferees; Comcast Corporation, Transferor, to Time Warner Inc.,

Transferee; Time Warner Inc., Transferor, to Comcast Corporation, Transferee,

Memorandum Opinion and Order, adopted July 13, 2006, released July 21, 2006, at

Appendix B.

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apply to all cable program networks as broadband fiber optic cable

becomes more widely deployed. This exception has been termed by

some the “terrestrial loophole.”

the broadcast ownership rules17 and cable ownership rules18,

which can affect the relative negotiating strength of programmers

and distributors by restricting or allowing their reach in national or

local markets. For example, some parties have argued that changes

in broadcast ownership rules that allow broadcasters to own more

than one television station in a market has significantly strengthened

the retransmission consent bargaining position of those broadcasters

that own or control more than one station in a local market.19

certain statutory exemptions from the antitrust laws for sports

leagues.20

In addition to these federal rules, there sometimes is informal government

intervention into programmer-distributor negotiations because of political sensitivity

to consumers losing access to programming — and especially local programming.

Parties involved in negotiating impasses, or consumers affected by those impasses,

often will seek intervention by an elected official or regulatory agency, even where

there is no formal process for such intervention. In some instances, political pressure

The FCC has long regulated broadcast ownership as a means of promoting diversity,

competition, and localism in the media without regulating the content of broadcast speech,

pursuant to sections 307, 308, 309(a), and 310(d) of the Communications Act (47 U.S.C. §§

307, 308, 309(a), 310(d)), which authorize the Commission to grant and renew broadcast

station licenses in the public interest.

Section 613(f) of the Cable Television Consumer Protection and Competition Act of 1992

amended the Communications Act of 1934, directing the FCC to conduct proceedings to

establish reasonable limits on the number of subscribers a cable operator may serve

(horizontal limit) and the number of channels a cable operator may devote to its affiliated

programming networks (vertical, or channel occupancy limit). Congress intended the

structural ownership limits mandated by Section 613(f) to ensure that cable operators did

not use their dominant position in the MVPD market, acting unilaterally or jointly, to

unfairly impede the flow of video programming to consumers. (47 U.S.C. § 533(f))

See, for example, Linda Moss and Mike Farrell, “Dueling for Dollars,” Multichannel

Newswire, March 5, 2007, available at [http://www.multichannel.com/index.asp?layout=

articlePrint&articleid=CA6421302], viewed on June 28, 2007.

In its 1922 ruling in Federal Baseball Club of Baltimore v. National Baseball Clubs, the

Supreme Court ruled that baseball is a sport subject to state regulations, not a business

involved in interstate commerce that would be subject to the federal antitrust laws.

Although the Supreme Court acknowledged in its 1953 decision in Toolson v. New York

Yankees, Inc. and again in its 1972 decision in Flood v. Kuhn that the baseball’s antitrust

exemption was “an anomaly,” it ruled that it is up to Congress to change baseball’s antitrust

exemption. Other sports leagues do not enjoy the same broad antitrust exemption as

baseball. But the Sports Broadcasting Act of 1961 (15 U.S.C. 1291) created a limited

antitrust exemption that allows a league to negotiate the broadcasting rights for all the teams

in a football, baseball, basketball, or hockey league. The Act was amended in 1966 to

exempt the combining of any professional football leagues.

CRS-8

can be placed on a party to resolve a contractual conflict in a fashion that it would not

agree to in a strictly private negotiation.21 In at least one situation in which a cable

company and broadcast station reached an impasse in retransmission consent

negotiations and the local broadcast signal was removed from the cable company’s

offering, a city attorney threatened legal action against the cable company unless the

broadcast signal were restored, claiming that not providing the signal was a violation

of the franchising agreement between the city and the cable company.22

Recently, there have been more frequent incidents of programmers and MVPDs

failing to reach contractual agreements, and in several instances one or the other party

— or end users who were affected by the impasse — have sought federal

government intervention either at the FCC or with Congress. The parties seeking

intervention often propose modification of existing statutory provisions or regulatory

requirements that allegedly favor one side in the negotiations or undermine the

successful consummation of negotiations.23 Although these impasses have involved

a number of different issues, the most controversial (and widely publicized) conflicts

have involved unresolved retransmission consent negotiations or agreements that

would award a single distributor exclusive rights for sports programming or that

would require that high-priced sports networks be placed on the expanded basic tier.

There are three basic functional components to the provision of video

programming: producing content; assembling content into a programming package,

such as a network, that can be efficiently distributed; and distributing the

programming to end users. (For convenience, in this report, the content assembler

is called a programmer.)

Some cable companies have complained that although, once a broadcast station has

chosen the retransmission consent option rather than the must-carry option, there is no

statutory requirement for a cable company to reach a retransmission consent agreement with

the broadcast station if it is not in the cable company’s interest to do so, in practice the

political pressure placed on the cable company can force it to accept a detrimental contract.

See, for example, the lengthy interview of Fred Dressler, executive vice president of

programming, Time Warner Cable, presented as “Past, Present and Future: An Oral History;

Fred Dressler reflects on his career, the industry and its future,” An Advertising Supplement

to Multichannel News, December 18, 2006, at pp. 18a-36a.

See Anne Veigle, “Cox Maneuver Puts TV Stations Back on Cable,” Communications

Daily, February 3, 2005, at pp. 4-5.

There is precedence for changing regulations affecting the programmer-distributor

relationship as market conditions change. For example, in 1970, prior to the development

of cable and satellite television, when the then-three major broadcast networks (CBS, NBC,

and ABC) captured approximately 90% of television viewers, the FCC implemented

Financial Interest and Syndication Rules (Fin-Syn Rules) that prohibited the networks from

holding a financial interest in the television programs they aired beyond first-run exhibition

and from creating in-house syndication arms. Consent decrees executed by the Department

of Justice in 1977 solidified the rules and limited the amount of prime-time programming

the networks could produce themselves. In 1991, based in part in the decrease in major

broadcast networks’ audience market share to approximately 65%, the FCC relaxed the FinSyn Rules. Appeals courts later relaxed the rules even further, in effect eliminating the rules

by November 1995.

CRS-9

In most cases, the programmer is a media company that packages individual

programs or program series to create an over-the-air broadcast network or a cable

network. That programmer may or may not own the production studio or sports team

where the creative talent (actors, directors, athletes, etc.) directly produces the

content, that is, may or may not vertically integrate “backwards” into direct

production. On occasion, a sports team or league will vertically integrate forward by

packaging its own games and other programming into a network under its own brand

name (for example, a National Football League, Major League Baseball, or Yankees

network). Also, sometimes a company is both a programmer and a distributor. For

example, while an over-the-air broadcaster is just a programmer for the majority of

households that receive their video programs from an MVPD, it is also a distributor

of that programming to the minority of households that continue to receive their

programming over-the-air. Similarly, most of the large MVPDs have vertically

integrated backward and now have partial or total equity interests in some of the

cable networks distributed over their cable or satellite systems. Several MVPDs also

own sports teams (for example, Cablevision owns the New York Knicks) and thus

are content producers, as well. Moreover, the large media companies that own

broadcast networks also own cable networks and often tie distributor access to their

broadcast networks to agreement to carry some of their cable networks.

Further complicating these relationships, although existing statutory rules give

the local broadcast station the right to negotiate the terms under which it makes its

programming available for retransmission by MVPDs, many of those local

broadcasters are affiliated with a national television network and, in their affiliation

agreements with the national network, give the network the right to negotiate the

terms of retransmission consent. Moreover, increasingly the negotiations between

large programmers and large distributors also involve video-on-demand rights to

large portions of the programmer’s library of content, as well as provisions setting

conditions on how the programmer can make its programming available for Internet,

cellphone, and other new avenues of distribution. In addition, during the transition

from analog to digital transmission and the initial deployment of high definition

technology, programmer-distributor negotiations increasingly involve issues of

whether a program will be carried in multiple formats (analog and digital, high

definition and standard definition) and whether a network will be placed on an analog

or digital tier.

Despite all these complexities, the relationships among content producer,

programmer, and distributor are characterized by mutual need — both the content

producer and the programmer need distributors that have direct contact with the

potential audience; the distributor needs content producers and programmers with

good content to attract subscribers. At the same time, there is an inherent tension as

each seeks to capture the lion’s share of the value that consumers place on the

content. Each must weigh the potential loss if an impasse occurs and the

programmer refuses to permit the distributor to carry the programming or if the

distributor chooses not to carry the programming. For example, for the programmer

that potential loss could take the form of foregone compensation from the MVPD

CRS-10

and/or foregone advertising revenues as advertisers respond to a reduced audience,24

both of which could be substantial if the MVPD’s subscribers represent a significant

portion of the programmer’s total audience and if those subscribers do not switch to

another MVPD that does carry the programmer’s network. For the distributor, that

potential loss could take the form of foregone subscriber revenue if, without the

programming as part of its offering, some end users shift to a competing MVPD, as

well as foregone advertising revenues. The losses could be substantial if many

subscribers switched to a competing MVPD. Given these risks, negotiating impasses

usually are avoided. Over time, market forces have led to the adoption of business

models that serve content providers, programmers, and distributors.

But these business models represent an unstable equilibrium. When market

conditions that affect the relative negotiating strength of content providers,

programmers, and distributors change, the newly strengthened party typically

attempts to change the prevailing business model to its advantage. That is happening

today. Content providers and programmers are taking advantage of structural market

changes favorable to them to pressure MVPDs to make cash payments for

programming that until now was available either for free or for non-cash

considerations (or, where cash payments have been made in the past, to make higher

cash payments). Some MVPDs have had sufficient countervailing market power to

resist, or limit, these changes, but others have not. This had led to calls by the

smaller, often rural, MVPDs for modifications to the retransmission consent rules

and other federal rules that allegedly favor programmers — and, in particular, local

broadcast stations — in their negotiations with distributors.

There is one critical business practice that tends to hold for the contractual

relationships at all levels — the practice of including a strict non-disclosure provision

that prohibits the parties from revealing the terms, rates, and conditions in the

contract. This practice limits the information publicly available to the negotiating

parties and thus tends to favor the larger parties (whether programmers or

distributors) who are involved in more negotiations and thus privy to more

confidential information. This practice also severely limits public policy makers’

access to information, since even parties that would be willing to make such

information available to government agencies are prohibited from doing so.

This report first analyzes the changing programmer-distributor market dynamics

for non-sports programming that are threatening to undermine traditional business

models.25 It then provides examples of recent programmer-distributor conflicts that

Kagan Research reported in Economics of Basic Cable Networks, 2006 (at p. 5) that the

advertiser-supported cable networks had gross advertising revenues of $13.7 billion and also

had license fee revenues of $13.7 billion in 2004. Kagan projected that in 2009 those totals

would be $25.4 billion and $24.2 billion, respectively. In contrast, broadcast networks

historically have received almost all of their revenues from advertising, not from per

subscriber fees imposed on MVPDs. Broadcaster attempts to increase those per subscriber

fees have been at the core of the recent broadcaster-MVPD retransmission consent conflicts.

This report does not directly address sports programming because there are a number of

factors that are unique to sports programming — such as vertical integration by the content

(continued...)

CRS-11

reflect these market changes. Finally, it discusses proposals made by various parties

to modify current statutory and regulatory rules in light of the market changes.

Market Changes Affecting the ProgrammerDistributor Relationship

The increase in programmer-distributor conflicts is, in large part, the result of

several structural changes in the video market that are affecting the relative

negotiating strengths of the various parties and hence undermining prevailing

business models and affecting the availability and pricing of video programming for

consumers.

More Distribution Options

The most significant structural change in the video market is the increase in the

number of program distribution options. Today, programmers can distribute their

product not only through traditional broadcast television stations and cable operators,

but also through direct broadcast satellite operators and other satellite companies, the

new multichannel video offerings of the major telephone companies, cable

“overbuilders,”26 on-line video streams, and even cellular telephones. As a result,

programmers have more options available to them to reach audiences and are able to

negotiate with distributors from a position of strength, often demanding terms,

conditions, and rates that are more favorable to themselves and less favorable to

distributors than those that have prevailed in the past.27 The market implications are

greatest for “must-have” programming, such as major sports programming and the

programming of the four major broadcast networks, for which a significant portion

of subscribers have a sufficiently strong intensity of demand that they consider

carriage of that programming a prerequisite for subscribing with an MVPD. An

MVPD that does not offer must-have programming may find itself at a significant

competitive disadvantage in the market. By contrast, the prevailing business model

was developed — and some of the programmer-distributor contracts that are

(...continued)

providers into distribution, the unique demand characteristics of sports fans, the lack of

close substitutes for major sports leagues, and the seasonal nature of sports — that yield

viable business models that do not apply to non-sports programming. Sports programming

is addressed in this report to the extent it represents “must-have” programming that affects

programmer-distributor negotiations that affect non-sports as well as sports programming.

These are companies that have been awarded franchises by local franchising authorities

and have built their own wireline networks in areas already served by an incumbent cable

operator. These overbuilders frequently offer broadband access service as well as cable

service and often serve smaller geographic areas than the incumbent cable operator,

sometimes serving only high-rise buildings.

For example, a Sinclair Broadcast Group executive reportedly has stated that as cable,

satellite, and telephone companies all seek to distribute Sinclair’s broadcast signals, Sinclair

has more bargaining power than it had in the past. See Joe Morris, “Cable, WCHA at Odds:

Broadcast Dispute Might Go To Court,” Charleston Gazette, July 7, 2006, at p. 1.C.

CRS-12

currently expiring were negotiated — in the early and mid 1990s, when cable

operators typically were the monopoly MVPD in their service area and therefore had

countervailing market power when negotiating with programmers, including those

programmers with must-have programming.

One group of distributors — small and mid-sized cable companies — has been

placed in a particularly difficult position by this structural market change, while a

second group of distributors — the newly-entering telephone companies — has

hastened this change. And both, in turn, have had an impact on all distributors.

Small and mid-sized cable companies often face direct competition from the two

major satellite companies, DirecTV and DISH Network. These cable companies

have far fewer subscribers than the major satellite companies and thus when

negotiating with programmers typically do not pose a serious risk to the programmers

if there is an impasse and the programming is not carried; a programmer’s foregone

per subscriber fees from these cable companies and foregone advertising revenues

would not be substantial. By contrast, a programmer’s revenues could be

significantly reduced if one of the satellite companies discontinued carriage, since

each of the satellite carriers have more than 13 million subscribers.28 Moreover,

many of the smaller cable companies have limited or no ability to offer telephone and

broadband access services and therefore limited ability to offer bundled

video/telephone/broadband services that tend to foster customer retention even when

favored programming is no longer carried. Thus, if an impasse were to occur, a

smaller cable company would face significant risk of losing subscribers to satellite

companies. In fact, where a smaller cable company has had an impasse with a

programmer, sometimes the programmer — or a satellite operator that has an

agreement with the programmer and is competing with the cable company — has

offered a “bounty” of upwards of $200 to households to switch to the satellite

service, with these offers marketed over the programmer’s network while the

programmer-cable company negotiations are still on-going.29

The telephone company entrants, which are starting to offer multichannel video

service and therefore must offer a wide array of programming to attract consumers

away from incumbent cable and satellite providers, also have very limited leverage

This is a greater concern for a national programmer (such as a cable network or a

broadcast network) than for a local programmer (such as a local broadcast station).

It is not always clear whether it is the satellite company or the programmer that is actually

paying the customer to switch MVPD. For example, when Sinclair Broadcast Group and

Mediacom Communications were in an impasse in retransmission consent negotiations late

in 2006, Mike Wilson, the general manager of Sinclair’s Fox 17 station in Iowa issued a

statement to viewers, stating in part that “the termination of our relationship with Mediacom

need not limit your ability to continue to watch us.... you may choose to subscribe to either

DirecTV or to the Dish Network, both of which will continue to carry FOX 17. We

particularly encourage you to call DirecTV ... because if you sign up with them prior to

December 1, 2006 and comply with certain requirements, FOX 17 WILL PAY YOU $150

(which will be applied as a rebate against your DirecTV bill, which will be applied as fifteen

$10 rebates against each of your first 15 monthly DirecTV bills)!” The Wilson statement

is available at [http://www.longren.org/2006/10/30/more-on-mediacom-vs-sinclair/], viewed

on June 27, 2007.

CRS-13

in their negotiations with programmers. But this situation may not be particularly

harmful to the telephone companies’ business plans for several reasons. First, they

may be less resistant to a higher per subscriber charge for access to programming

than has previously prevailed in the market because they currently have very few

subscribers and thus this cost represents a very small portion of their market entry

costs. Their costs for programming, even if paying a premium, pale in relation to the

capital investments and operating costs associated with truck rolls to customer

premises needed to bring fiber or other wireline broadband technologies close to the

home. Moreover, in contrast with the smaller cable companies, the telephone

companies have significant revenues streams from telephone and broadband access

services that contribute toward the fixed costs of their infrastructure.

The willingness of the telephone companies to pay more than the previously

prevailing rates for programming and the inability of many smaller cable operators

to withstand programmer demands for higher payments have adversely affected the

ability of the large incumbent MVPDs — cable and satellite — to resist less

favorable terms for programming, despite the countervailing market strengths that

they bring to their negotiations. Although these large MVPDs have rarely had an

impasse in negotiations that resulted in carriage of particular programming being

disrupted, the trade press has noted very contentious negotiations and (despite

contractual language requiring all parties to keep all terms confidential) evidence that

the cash payments that the large cable and satellite companies are paying for popular

programming are increasing.30

Ironically, the market consequence of greater competition in the distribution of

video programming appears to be greater negotiating leverage for programmers with

popular — and especially must-have — programming, resulting in higher

programming prices that MVPDs tend to pass through at least partially to subscribers.

Consolidation and Clustering of Cable Operators

At the same time that additional distribution options have become available to

video programmers, consolidation (acquisitions resulting in a small number of large

firms serving an increasing portion of total subscribers, nationwide) and clustering

(acquisitions resulting in individual firms serving an increasing portion of subscribers

in a particular local market) are occurring among cable operators and the two major

satellite operators are growing, so that the largest video distributors are serving a

higher share of total MVPD subscribers than they have in the past and the large cable

operators’ serving areas have become increasingly concentrated into a small number

of very large clusters. These trends are the result of acquisitions by the large cable

The very large cable companies appear to have been more successful than the two large

satellite companies in resisting cash payments, for several reasons. Their strategy to cluster

their systems in a limited number of local markets has given them high subscriber

penetration in those markets, which helps in negotiations with local broadcast stations.

Also, their ability to offer bundles of video, voice, and data services reduces the likelihood

that subscribers will change provider based solely on the loss of a particular video program.

Finally, they are negotiating from a history of not making cash payments (at least to

broadcasters), and this has created an inertia that takes greater effort for the programmers

to overcome.

CRS-14

companies of smaller cable companies, swaps among cable systems of local cable

systems that have allowed single companies to become the dominant cable provider

in metropolitan statistical areas or beyond, and successful market growth by the two

large DBS operators, DirecTV and DISH Network. As shown in Table 1, which

reproduces data provided in the FCC’s most recent report on the status of

competition in the market for the delivery of video services, since 2002 the

percentage of total MVPD subscribers served by the largest MVPDs has grown and

concentration in the market for the purchase of video programming, as measured by

the Herfindahl-Hirschman Index,31 has increased. These figures do not reflect the

2006 purchase by the two largest cable companies, Comcast and Time Warner, of the

cable operations of Adelphia, which had been the fifth largest cable operator but fell

into bankruptcy. Thus concentration is even greater today, although it is likely that

the trend will be reversed as the two major telephone companies, AT&T and

Verizon, continue to roll out their video service offerings, which currently are

available in only a few geographic markets.

Table 1. Consolidation in the National Market for the Purchase

of Video Programming (Percentage of MVPD Subscribers),

2002-2005

Largest

MVPDs

2002

2003

2004

2005

Top 1

14.75%

22.69%

23.37%

22.99%

Top 2

29.04%

35.01%

35.47%

38.71%

Top 3

41.03%

46.63%

47.34%

50.99%

Top 4

50.48%

55.98%

57.97%

62.67%

Top 10

84.44%

81.95%

84.72%

88.39%

Top 25

90.26%

87.45%

90.41%

94.00%

Top 50

92.05%

89.29%

92.32%

95.73%

HHI

884

1031

1097

1201

Source: Federal Communications Commission, In the Matter of Annual Assessment of the Status of

Competition in the Market for the Delivery of Video Programming, Twelfth Annual Report, adopted

February 10, 2006 and released March 3, 2006, at p. 119, Table B-4.

Table 2 lists the 25 largest cable operators, which are often referred to as

multiple system operators or MSOs, and the number of subscribers they had as of

December 2006. It is noteworthy that the largest MSO, Comcast, had almost as

many subscribers as numbers 3 through 25 combined.

The Herfindahl-Hirschman Index (HHI) is the most commonly accepted measure of

market concentration. It is calculated by squaring the market share of each firm and then

summing the resulting numbers. The higher the HHI, the more concentrated the market.

The HHI can range from close to zero for a market of many tiny firms to 10,000 for a

monopoly. The Department of Justice and Federal Trade Commission use the HHI when

evaluating mergers. They consider a market with an HHI of 1,000 to 1,800 to be moderately

concentrated and a market with an HHI of 1,800 or greater to be highly concentrated. As

a general rule, if a merger in an already-concentrated market would increase the HHI by

more than 100 points, that would raise antitrust concerns.

CRS-15

Table 2. The 25 Largest Cable Operators as of December 2006

Rank

Cable Operator

Number of

Subscribers

Rank

Cable Operator

Number of

Subscribers

Comcast

24,161,000

Service Electric

287,800

Time Warner

13,402,000

Armstrong Group

231,600

Charter

5,398,900

Atlantic Broadband

231,500

Cox

5,395,100

Midcontinent

195,900

Cablevision

3,127,000

Pencor Services

182,900

Bright House

2,307,400

Knology

178,600

Mediacom

1,380,000

Millenium Digital

157,100

Suddenlink

1,360,000

Buckeye

145,500

Insight

1,322,800

Northland

144,300

CableOne

641,500

MidOcean

138,400

RCN

371,100

Grande

137,500

WideOpenWest

361,200

MetroCast

137,300

Bresnan

294,000

Source: Table prepared by National Cable and Telecommunications Association based on data from

Kagan Research, LLC, available at [http://www.ncta.com/ContentView.aspx? contentId=73], viewed

on June 28, 2007.

Had the satellite operators, DirecTV and DISH Network, been included in this

list, they would have ranked second and fourth, respectively.32 But satellite operators

have a somewhat different market impact because they have subscribers dispersed

all around the country, while cable companies tend to cluster their systems in a

limited number of geographic areas. (An individual cable cluster most likely consists

of multiple cable franchises negotiated with many local jurisdictions.) In the early

years of the cable industry, most of the larger firms bidding for cable franchises did

not focus their efforts on narrow geographic regions. As a result, the larger cable

operators tended to have cable franchise that were widely scattered geographically.

Subsequently, many of these large firms traded franchises, to develop clusters in a

smaller number of geographic areas. Clustering provides economies of scale in

operations, marketing, and customer service. It also strengthens a cable operator’s

retransmission consent negotiating position with broadcasters, who are less likely to

risk the foregone subscriber fees and advertising revenues from an impasse with (and

discontinued signal carriage by) a cable operator if that operator serves a large

portion of the broadcaster’s viewing area.

According to the 2006 10-K reports filed by DirecTV and EchoStar Communications (the

parent of DISH Network) with the Securities and Exchange Commission (SEC), as of

December 31, 2006, DirecTV had approximately 16 million subscribers in the United States

(at p. 3) and DISH Network had 13.105 million subscribers (at p. 1).

CRS-16

As shown in Table 3, there are 113 cable clusters serving at least 100,000

subscribers. But reviewing this table in conjunction with Table 2, it is notable that

102 of those clusters are owned by the five largest cable operators and only two are

owned by cable operators that are not among the 10 largest.

Table 3. Cable Television System Clusters

Serving More Than 100,000 Subscribers, as of December 2005

Company

Basic Subs

Cablevision, New York Area

3,026,994

Charter, Georgia

298,900

Comcast, Boston, MA

1,937,802

Charter, Los Angeles

Metro

292,500

Time Warner, Los Angeles

1,928,340

Charter, North Wisconsin

292,100

Comcast, Philadelphia

1,916,460

286,900

Comcast, Chicago

1,800,000

Comcast, San Francisco Area

1,654,358

Time Warner, New York

1,400,000

1,032,013

1,021,281

Time Warner, Rochester

264,603

1,000,000

962,059

833,223

777,428

Cox, Middle America Cox

776,000

Cox, Arizona

773,000

Time Warner, Houston, TX

754,611

Comcast, Atlanta, GA

Comcast, Miami, FL

Mediacom, South Central

Comcast, New York

Mediacom, North Central

Comcast, Denver, CO

733,691

740,274

723,000

705,736

698,000

666,012

Comcast, Baltimore, MD

649,366

Comcast, Pittsburgh, PA

607,574

Cox, Northern Virginia

Comcast, Ft. Myers-Naples

Time Warner, PortlandAuburn, ME

Charter, West Virg.

Comcast, Salt Lake City,

Charter, No. Car./Virginia

Charter, Southern

Wisconsin

Cox, West Texas

Charter, Mid America

Comcast, Fresno-Visalia

Comcast, Tampa/Sarasota

Cox, Omaha, NE

Comcast, Memphis, TN

Charter, Northern

Michigan

Comcast, WheelingSteubenville

262,000

259,752

Comcast, Seattle, WA

Bright House, Tampa Bay,

Comcast, Washington, DC

Comcast, Detroit, MI

Time Warner, ClevelandAkron- Canton, OH

Bright House, Central FL

Charter, Northwest

Time Warner, Syracuse,

Insight, Louisville, KY

Comcast, RichmondPetersburg

Comcast, Indianapolis, IN

546,814

Charter, Easter Michigan

195,700

539,627

Charter, Central California

190,600

538,000

188,900

535,294

Charter, West Michigan

Comcast, AlbuquerqueSante Fe

Comcast, Hartford-New H,

Comcast, St. PaulMinneapolis

Cox, San Diego, CA

Comcast, Sacramento, CA

Company

Basic

Subs

280,100

276,400

272,821

270,755

252,630

247,300

244,680

239,000

229,100

219,000

217,200

208,386

203,947

203,000

201,201

199,600

197,660

186,533

CRS-17

Company

Basic Subs

Company

501,000

487,700

Cox, Baton Rouge, LA

Charter, Louisiana/Miss.

470,809

Cox, Gulf Coast/Florida

168,100

Cox, Oklahoma

Charter, Tennessee/Kentucky

Time Warner, RaleighDurham

Cox, New England

Basic

Subs

180,000

168,400

456,000

164,700

Charter, St. Louis Metro, MO

452,900

426,507

415,000

412,517

Comcast, Knoxville, TN

157,693

Time Warner, Charlotte, NC

Cox, Hampton Roads, VA

Time Warner, Milwaukee,

Cox, Las Vegas

Comcast, Portland, OR

Charter, Ft. Worth, TX

Time Warner, Columbia,

Comcast, Eugene, OR

Comcast, Salisbury, MD

410,000

398,996

146,501

145,100

Time Warner, Hawaii

393,280

Time Warner, Cincinnati, OH

388,592

Time Warner, San Antonio

384,400

380,319

Time Warner, Albany, NY

Comcast, Harrisbrg-LncstrLeb-York, PA

Comcast, W. Palm Beach-Ft.

Pierce, FL

Time Warner, Columbus, OH

Comcast, Gand RapidsKalamazoo-B.Cr, MI

Comcast, Jacksonville,

Brunswick

Charter, New England

Charter, Alabama

Time Warner, Greensboro,

Comcast, Nashville, TN

Charter, Minnesota/Nebraska

Time Warner, Austin, TX

Time Warner, Green Bay

Charter, Nevada

Atlantic Broadband,

Western PA

Charter, Inland Empire

Comcast, Colorado Spr.Pueblo

Comcast, Chattanooga, TN

Buckeye Cable, Toledo,

Comcast, BurlingtonPlattsburgh

Insight, Peoria, IL

Comcast, RoanokeLynchburg, VA

Cox, Kansas

Charter, South Carolina

370,267 100

370,216 101

364,608 102

362,231 103

163,455

161,308

159,192

142,935

138,900

137,121

126,859

126,150

126,013

123,000

121,520

357,707 104 Insight, Northern Illinois

117,000

356,200 105 Insight, Northeast Indiana

350,200 106 Comcast, Orlando, FL

Time Warner, Wilmington,

348,290 107

327,920 108 Comcast, Savannah, GA

327,800 109 Insight, Springfield, IL

316, 911 110 Comcast, Charleston, SC

Time Warner, Waco307,000 111

Temple-Bryan, TX

Comcast, Johnstown302,600 112

Altoona, PA

301,656 113 Comcast, Augusta, GA

116,900

116,081

115,905

112,113

111,600

109,506

108,714

107,800

Time Warner, San Diego, CA

106,343

Time Warner, Kansas City,

300,317

Source: Kagan Research, Broadband Cable Financial Databook, 26th edition, 2006, at pp. 27-28.

Note: Pro forma Comcast/Time Warner acquisition of Adelphia Communications.

CRS-18

Cable system consolidation and clustering have different programmerdistributor negotiating implications when the programmer has national reach (for

example, a national cable program network or a national broadcast network) vs. local

reach (for example, a local broadcast station). As explained below, consolidation

increases the leverage of a cable system relative to national program networks, while

clustering increases the leverage of a cable system relative to local broadcast stations.

Negotiating with a cable program network.

Cable program networks get approximately half their revenues from per

subscriber fees imposed on MVPDs and half from advertising.33 And those

advertising fees depend on the number of subscribers reached, so the more

subscribers an MVPD reaches, the more valuable that MVPD is to the program

network. Cable program networks that fail to achieve substantial penetration on

MVPD systems face financial peril. In recent proceedings at the FCC, parties have

filed comments asserting that in order to generate the advertising revenues necessary

for success, a national program network must reach between 40 and 60 million, and

perhaps as many as 75 million, subscribers.34 Carriage on the major MVPD systems

— Comcast, Time Warner, DirecTV, and DISH Network — therefore is key to cable

program network success. Cable program network business strategies therefore focus

on obtaining and retaining such carriage. For a new cable program network, that

might involve giving one of the major MVPDs an equity interest in exchange for

carriage. For an established cable network with a strong brand identity, that might

involve creating a sister network and demanding MVPDs to carry the new network

in lieu of cash for carriage of the established network. But even an established

program network is unlikely to risk a negotiating impasse that results in discontinued

carriage by any of those large MVPDs.

As shown in Table 4, the 20 most widely distributed advertiser-supported cable

program networks each are available to more than 90,000,000 households vias

MVPD subscription. Comparing Table 2 to Table 4, it is clear that the cable

program networks that have achieved penetration rates of 90,000,000+ enjoy carriage

on each of the four largest MVPD systems — the systems of the two largest cable

operators as well as on the systems of the two major DBS operators.35 As shown in

Table 2, subscriber reach falls quite quickly beyond those large MVPDs. While

cable program networks will seek carriage on all MVPDs, as the subscriber reach of

See footnote 24 above.

See In the Matter of Applications for Consent to the Assignment and/or Transfer of

Control of Licenses: Adelphia Communications Corporation (and subsidiaries, debtors-inpossession), Assignors, to Time Warner Cable Inc. (subsidiaries), Assignees; Adelphia

Communications Corporation (and subsidiaries, debtors-in-possession), Assignors and

Transferors, to Comcast Corporation (subsidiaries), Assignees and Transferees; Comcast

Corporation, Transferor, to Time Warner Inc., Transferee; Time Warner Inc., Transferor,

to Comcast Corporation, Transferee, Memorandum Opinion and Order, adopted July 13,

2006, released July 21, 2006, at para. 101 and fn. 354.

Moreover, these cable program networks most likely have attained carriage on the most

basic tier offered by these MVPDs — that is, the one with largest number of subscribers, for

example, the “top 60” tier, rather than the “top 120” tier.

CRS-19

the MVPD falls, the financial risk to a cable program network provider of failing to

reach a carriage arrangement with the MVPD falls. This may make it easier for the

cable network provider to push harder for a high per subscriber fee from a smaller

MVPD. From the perspective of a small or mid-sized cable operator, however,

failing to reach a carriage arrangement for a relatively popular cable program network

that is carried by DirecTV and/or DISH Network can be risky. Thus, a cable

operator’s negotiating position vis-a-vis cable network programmers will be

strengthened by consolidation.

Table 4. Cable Program Networks with the Largest Number

of Subscribers, as of December 2006

Rank

Network

Subscribers

Rank

Network

Subscribers

Discovery

92,500,000

A&E

91,800,000

ESPN

92,300,000

TBS

91,700,000

CNN

92,300,000

Learning Channel

91,700,000

TNT

92,100,000

Spike TV

91,700,000

Lifetime

92,100,000

CNN Headline News

91,500,000

USA

92,100,000

ABC Family Channel

91,300,000

Weather Channel

92,000,000

MTV

91,300,000

Nickelodeon

91,900,000

Home and Garden

91,200,000

History Channel

91,900,000

Food Network

91,100,000

ESPN2

91,800,000

Cartoon Network

91,000,000

Source: Table prepared by National Cable and Telecommunications Association based on data from

Kagan Research, LLC, available at [http://www.ncta.com/ContentView.aspx? contentId=74], viewed

on June 28, 2007.

Negotiating with a national broadcast network.

When a local broadcast station that is affiliated to a broadcast network has

assigned its retransmission consent rights to the network, the negotiations between

the network and the MVPDs are likely to be somewhat akin to those between large

cable programmers and MVPDs — with the national subscriber reach of the MVPD

an important factor. The major broadcast networks own both multiple broadcast

streams and cable networks, and are likely to seek compensation in some

combination of: the MVPD’s carriage (and tier placement) of other program

networks owned by the broadcaster, the MVPD’s purchase of advertising time on the

broadcast station, the broadcaster being given free advertising time on the MVPD’s

system, and cash payments. The broadcast networks, in offering the most popular

programming, enjoy an even stronger negotiating position than most cable program

networks, but even the major broadcast networks are unlikely to want to risk an

impasse with a large MVPD that serves 10 million or more subscribers.

CRS-20

Negotiating with a local broadcast station or non-network

broadcast group.

The negotiating dynamic may be quite different when a broadcast station is

conducting its own negotiations with MVPDs — which appears to be happening

more often these days. In this situation, the broadcaster’s reach is limited to the local

market (DMA) in which its station is located or, in the case of a station that is part

of a non-network broadcast group, the local markets in which the group has stations.

Its concern will not be with the total subscriber reach of the MVPDs with which it

is negotiating, but rather with the subscriber reach of those MVPDs within the local

markets in which the group has stations. DBS operators are likely to offer service in

many or all of those markets, but an individual cable company, even one as large as

Comcast or Time Warner, is unlikely to operate in all those local markets. What

becomes most important, then, is whether the cable company is clustered in the

market or markets in which the broadcaster has stations. Comparing the subscriber

reach of cable clusters presented in Table 3 to the populations of the markets covered

by those clusters, it is clear that there are many cable clusters that serve a substantial

portion of the households in the local broadcast markets in which they are located.

In these situations, the local broadcasters are less likely to risk a negotiating impasse

with the clustered cable company and therefore likely to face constraints on the

demands they can make for retransmission consent compensation.

Charter Communications CEO Neil Smit has stated that actions it has taken to

increase the densities of its existing clusters have strengthened its position in

retransmission consent negotiations, making it more difficult for station groups to

play hardball given that they would put greater portions of their ad revenues at

stake.36 One industry observer has described this negotiating situation as follows:

Cable operators have more clout than telcos and even DBS. Cable operators are

big enough in major markets to take a broadcaster dark in 60%-80% of local

homes overnight. That would guarantee immediate pain as major advertisers

cancel. But a DBS operator might serve just 10%-20% of local homes so it can

inflict far less pain. Telcos are in the weakest position.37

More Program Networks/Fragmented Audiences

Another major structural market change has been the dramatic expansion in the

number of program networks (sometimes referred to as channels) available to

consumers, with a resulting fall in average audience size per channel. As shown in

Table 5, the number of video channels received by the average U.S. household

increased from 18.8 channels in 1985 to 104.2 channels in 2006, but neither the

number of television households nor the average household viewing time per day

increased nearly so dramatically during that period. Thus the average audience size

See Mike Farrell, “Smit: Charter System Sales Could Help Retrans Talks,” Multichannel

Newswire, March 7, 2007, available at [http://www.multichannel.com/index.asp?layout=

articlePrint&articleid=CA6422613], viewed on June 27, 2007.

John M. Higgins, “Money Talks: CBS Braces for Cable Showdown,” Broadcasting &

Cable, March 27, 2006, at p. 10.

CRS-21

per program network has fallen substantially. Although the rapid growth in the

number of channels received by the average household has slowed in recent years,

channel availability continues to grow faster than total viewing hours. Moreover,

even the largest MVPD networks, which offer customers more than 200 channels,

cannot carry all available cable networks, which now number more than 500 national

networks as well as numerous regional networks.38

Table 5. Nielsen Data on Total Television Households,

Time Spent Viewing Per Household, and the Average Number

of Video Channels Received Per Household, 1985-2006

Year

Average Number of

Video Channels

Received

Television

Households in

the U.S. (millions)

Time Spent Viewing

Television, Per Day,

Per Household

2006

104.2

110.2

8 hrs 14 mins

2005

96.4

109.6

8 hrs 11 mins

2004

92.6

108.4

8 hrs 01 mins

2000

61.4

100.8

7 hrs 35 mins

1995

41.1

95.4

7 hrs 17 mins

1990

33.2

92.1

6 hrs 53 mins

1985

18.8

84.9

7 hrs 10 mins

Sources: All data from Nielsen Media Research, as follows — number of channels received, National

People Meter Sample, presented in a press release dated March 19, 2007, available at

[http://www.nielsenmedia.com] (under “Latest News,” then “More,” then “Last Six Months,” the

March 19, 2007), viewed on June 27, 2007; television households, NTI, September each year,

available at [http://www.tvb.org/rcentral/mediatrendstrack/tvbasics/02_TVHouseholds.asp], viewed

on June 27, 2007; time spend viewing television, per day, per household, NTI annual averages,

Audimeter sample for 1985, People Meter Sample for all other years, available at [http://www.tvb.org/

rcentral/mediatrendstrack/tvbasics/08_TimeViewingHH.asp], viewed on June 27, 2007.

This proliferation in program networks has had two general market implications.

On the one hand, the typical program network has an audience share of less than 1%,

and unless its programming has very strong appeal to a subset of subscribers who

would be willing to pay separately for that programming, is not likely to command

much compensation from MVPDs for carriage rights. It may well be that if such a

program network is not affiliated with an MVPD or with a major programmer it will

have to rely on the commercial leased access rules and pay to gain access to an

MVPD.39

On the other hand, the relatively few program networks that attract larger

audiences are valuable to MVPDs for two reasons. First, a program network that

attracts a larger audience is, other things equal, likely to have more viewers who

National Cable and Telecommunications Association, 2007 Industry Overview, at p. 7,

available at [http://i.ncta.com/ncta_com/PDFs/NCTA_Annual_Report_04.24.07.pdf],

viewed on June 27, 2007.

See footnote 14.

CRS-22

might choose among competing MVPDs based on the availability of that network’s

programming; there is greater business risk to MVPDs not to carry that program

network. Second, larger audiences tend to attract more advertising revenues for the

MVPD.

According to Kagan Research, in 2005, of the several hundred advertisingsupported cable networks, only 8 received from MVPDs average monthly license

fees of 40 cents or more per subscriber, only 24 received fees of 20 cents or more,

only 51 received fees of 10 cents or more, and only 112 received fees of 2 cents or

more.40 Clearly, the current price-driven programmer-distributor impasses do not

directly involve the vast majority of program networks; programmers cannot

command significant price increases for them and, in any case, losing the right to

carry such a program network is unlikely to result in significant subscriber migration

to competing MVPDs.

Some program networks, however, remain extremely valuable to MVPDs and,

in fact, in some ways network proliferation has increased the value of these networks,

even if their audience share has shrunk over time. Table 6 shows that although the

major broadcast networks’ share of U.S. television household usage has fallen

substantially over time, they continue to capture relatively large audiences. More

than 25% of all television usage (including usage to watch VCRs and to play video

games) is spent viewing the national programming offered by the four major

broadcast networks and the local and syndicated programming offered by those

networks’ local broadcast station affiliates, and that is projected to continue to

approach 25% of all usage at the end of the decade. Since both the national

programming and the local programming offered by these major network affiliates

attract such relatively large audiences, an MVPD in a market where there is

competition from other MVPDs could find itself at risk of losing substantial numbers

of subscribers if a contract negotiation impasse resulted in it not carrying the

programming of one of those affiliates.41 Interestingly, recent reports that the four

major broadcast networks lost 2.5 million viewers during the spring of 2007

specifically raised the impact that this might have on the advertising rates charged by

the networks, but did not address the potential impact on the broadcast networks’

negotiations with MVPDs.42

Kagan Research, The Economics of Basic Cable Networks, 2006, 12th Annual Edition,

2005, at pp. 58-60.

As will be discussed below, where a broadcaster owns or controls two major network

affiliated stations in a local market, it is likely to wield significant leverage in retransmission

consent negotiations with local cable systems because the latter would not want to risk

losing carriage of the programming of two major networks and two local stations.

See, for example, David Bauder, “Data Says 2.5 Million Less Watching TV,” Associated

Press wire, May 8, 2007.

CRS-23

Table 6. Estimated Share of U.S. Television Home Set Usage

by Program Source (%)

Source

Early

1950s

Early

1960s

Early

1970s

Early

1980s

Early

1990s

Early

2000s

Mid

2000s

Late

2000s

ABC/CBS/

NBC

DuMont

—

Fox/WB/

UPN/Paxnet

—

Network

Affiliates

Independent

Stations

PBS Stations

—

Pay Cable

—

AdSupported

Cable

—

Other Cable

—

VCR Play

—

Video Games

—

Average

Hours of Set

Usage

Weekly

Source: Media Dynamics, Inc., TV Dimensions 2006, Annual Report. The usage shares attributed to

broadcast networks covers their network-originated programming. The usage shares attributed to

network affiliates covers their locally-originated programming plus syndicated programming. The

average hours of set usage weekly counts multiple-set usage to different sources at the same time as

separate exposures.

The data in Table 7 on the cumulative weekly reach of various program

networks also show the breadth of viewership enjoyed by the major broadcast

networks. In any given week each of the four major networks is viewed (for at least

one ten-minute segment) by more than 70% of all U.S. television households, almost

double the viewership of the largest cable network.43

If the recent decreases in major broadcast network audiences persist, however, the gap

between broadcast network reach and cable network reach may shrink.

CRS-24

Table 7. The Average Weekly Cumulative Audience Reach

of the Largest Broadcast and Cable Program Networks,

First Quarter 2007

Program Network

Average Weekly Cumulative Market Reach

Broadcast Networks

CBS

74.5%

NBC

72.8%

ABC

72.6%

FOX

70.6%

44.1%

MNT

29.8%

Cable Networks

USA

37.7%

TBS

37.1%

TNT

36.6%

A&E

29.5%

28.9%

DISCOVERY

28.2%

LIFETIME

27.2%

COMEDY CENTRAL

27.2%

NICKELODEON

26.9%

SPIKE

26.8%

HISTORY

26.7%

AMC

25.9%

ESPN

25.1%

Source: Nielsen Media Research Television Activity Report, NHI First Quarter 2007, available at

[http://tvb.org/rcentral/mediatrendstrack/tvbasics/ 10_Reach_BdcstvsCable.asp], viewed on June 27,

2007.

Moreover, the four major broadcast networks provide almost all of the most

popular television programs. As shown in Table 8, during the 2005-2006 television

season, the 100 individual television programs with the largest audiences all were

major broadcast network programs. Although other broadcast programmers provided

shows that ranked among the second one-hundred in ratings, the highest-rated

advertiser-supported cable network program was ranked 236, the second highestrated cable network program was ranked 389. This table slightly overstates the

dominance of broadcast programming because it does not include premium cable

programming, such as The Sopranos, which despite seeing its audience size fall from

CRS-25

a high of 13 million households for some episodes in 2002 to 9 million household for

some episodes in 2006, still would have had some episodes among the 100 most

highly watched programs.44 Nonetheless, and despite the recent fall in the major

broadcast networks’ audiences, for the foreseeable future those broadcast networks

are likely to continue to provide the lion’s share of the most popular television

programs.

Table 8. The Individual Television Programs

with the Largest Audience Ratings,

2005-2006 Television Season

PROGRAM

SUPER BOWL XL (6:26P)

ACADEMY AWARDS

ROSE BOWL

FOX NFC CHAMP (6:47P)

AMERICAN IDOL-TUESDAY

AMERICAN IDOL-WEDNESDAY

AFC DIVISIONAL PLAYOFF- SA

DANCING WITH STARS-2/26

WNTR OLYM THU PRIME 2

CSI

AMERICAN IDOL THU SP-3/9

WNTR OLYM TUE PRIME 2

AMERICAN IDOL THU SP-3/2

CSI - THANKSGIVING

GREY’S ANATOMY SP 2-5/15

AFC/NFC PLAYOFF GM2

DESPERATE HOUSEWIVES

WNTR OLYM MON PRIME 2

WNTR OLYM PRIME 1

AMERICAN IDOL THU SP-2/23

WNTR OLYM SUN PRIME 1

FOX WORLD SERIES GAME 4

WNTR OLYM MON PRIME 1

WNTR OLYM OPEN CEREM

GREY’S ANATOMY

CRIMINAL MINDS PREVIEW SP

GOLDEN GLOBE AWARDS

WITHOUT A TRACE

ORANGE BOWL

DANCING WITH THE STARS

WITHOUT A TRACE-THANKS

WNTR OLYM THU PRIME 1

ABC

FOX

CBS

ABC

NBC

CBS

FOX

NBC

FOX

CBS

ABC

NBC

FOX

NBC

FOX

NBC

ABC

CBS

NBC

CBS

ABC

CBS

NBC

41.62

23.08

21.71

20.77

17.72

17.24

16.14

16.02

15.77

15.68

15.52

15.48

15.29

14.62

14.23

13.95

13.86

13.59

13.46

13.38

13.3

12.96

12.86

12.81

12.58

12.48

12.46

12.38

12.25

11.98

11.93

11.92

PROGRAM

WNTR OLYM FRI PRIME 2

TWO AND A HALF MEN

WNTR OLYM SAT PRIME 3

FOX NFC CHAMP-POST

DANCING W STARS RSLTS

DEAL OR NO DEAL-MON

FOX WORLD SERIES GAME 1

CSI: THU 8P SPECIAL

CSI MIAMI SPECIAL

FOX MLB NLCS GAME 6

COLD CASE

LOST

BARBARA WALTERS PRES

CSI-THU 8P SPECIAL

CSI: MIAMI - SPCL

CSI: NY

LAW AND ORDER: SVU

DESTINATION LOST

SURVIVOR: PANAMA-EX FIN

SURVIVOR: GUAT REUNION

FOX MLB LCS: GMS 1&2

DEAL OR NO DEAL - WED

SUGAR BOWL

60 MINUTES

BARBARA WALTERS PRES

FOX MLB DIV: AL GM 5

24 PRVW SP-1/15 9P

WNTR OLYM CLOSE CEREM

HOUSE SP-2/20 8P

CSI THU 8P-SPECIAL

TWO AND A HALF MEN SPL

ABC PREMIERE EVENT-4/10

NBC

CBS

NBC

FOX

ABC

NBC

FOX

CBS

FOX

CBS

ABC

CBS

NBC

ABC

CBS

FOX

NBC

ABC

CBS

ABC

FOX

NBC

FOX

CBS

ABC

The Television Advertising Bureau, which tabulates these ratings based on data collected

by Nielsen, explains that it does not include ratings data for the premium cable programs

because those programs are aired multiple times in a week, but the Nielsen data are

presented as the average audience, per showing, and therefore fails to measure the audience

size for the initial showing of each episode.

9.74

9.73

9.68

9.64

9.57

9.48

9.47

9.41

9.36

9.29

9.28

9.26

9.25

9.24

9.22

9.21

9.18

9.1

9.04

8.99

8.97

8.96

8.95

8.94

8.88

8.83

8.75

8.74

8.68

CRS-26

PROGRAM

CSI: MIAMI

SURVIVOR: GUATEMALA FIN

WNTR OLYM SUN PRIME 2

WNTR OLYM SAT PRIME 2

WNTR OLYM WED PRIME 1

WNTR OLYM FRI PRIME 1

WNTR OLYM TUE PRIME 1

CBS NCAA BSKBL CHAMP

CMA AWARDS

FOX WORLD SERIES GAME 2

FOX WORLD SERIES GAME 3

GRAMMY AWARDS

SURVIVOR: GUATEMALA

OSCAR COUNTDOWN 2006 PT 2

HOUSE SP-5/3 8P

HOUSE

SURVIVOR: GUATE THNKSGV

NFL MON NIGHT FOOTBALL

24 PRVW SP-1/15 8P

WNTR OLYM WED PRIME 2

NCIS

UNIT, THE

SURVIVOR: PANAMA-EXILE IS.

CBS

NBC

CBS

FOX

CBS

ABC

FOX

CBS

ABC

FOX

NBC

CBS

11.88

11.85

11.6

11.33

11.27

11.26

11.17

11.08

11.06

11.01

10.95

10.87

10.86

10.6

10.59

10.16

9.99

9.79

9.77

9.76

9.75

PROGRAM

WILL & GRACE CLIP SPCL

RUDOLPH-RED NOSE-RNDEER

NCIS 9P SPECIAL

EXT MAKEOVER: HOME ED.

CSI: MIAMI - SPECIAL

LOST SP-1/11

COLD CASE-SPECIAL

CHARLIE BRWN CHRISTMAS

24 PRVW SP-1/16

CROSSING JORDAN 4/16

DEAL OR NO DEAL 12/21

TWO AND HALF MEN-SPCL

COMMANDER IN CHIEF

NBC

CBS

ABC

CBS

ABC

CBS

ABC

FOX

NBC

CBS

ABC

8.57

8.56

8.55

8.53

8.51

8.49

8.45

8.4

8.39

236

389

419

476

487

526

562

569

586

NFL REGULAR SEASON L

MLB DIVISIONAL SERIES L

2006 NBA ALLSTAR GAME

STATE OF THE UNION 2006

S JIMMY TIMMY PWRHR2

NBA PLAYOFF-CONF FINALS L

S KIDS CHOICE 06

WWE ENTERTAINMENT

FOP MOVIE FAIRY IDOL

NBA ALLSTAR SAT NIGHT

ESPN

TNT

FXN

NICK

ESP

NICK

USA

NICK

TNT

5.66

4.43

4.26

3.8

3.73

3.6

3.51

3.28

3.21

2.94

Source: Television Bureau of Advertising, Viewer Track, “Top-rated programs of 2005-06 in

Households,” based on data from Nielsen Galaxy Lightning 9/19/05-5/24/06, Advertising-Supported

Subscription TV only, available at [http://www.tvb.org/rcentral/ViewerTrack/FullSeason/05-06season-hh.asp], viewed on June 27, 2007.

Table 8 highlights another key factor in programmer-distributor negotiations.

There often is a timing element to must-have programming that programmers can use

strategically in their negotiations with distributors. Television households are far

more likely to switch MVPD providers if they fear the loss of particular timesensitive programming, such as the Super Bowl, the Olympic Games, the National

Football League season, or the finale of American Idol or some other extremely

popular series. Some programmers have effectively timed their negotiations with

distributors to take advantage of such program schedules.45 In some cases,

programmers with the rights to sports events have agreed to month-to-month

extensions of lapsed agreements with MVPDs until a time when a key sports event

was imminent and then used the threat of lost access to that sports event as leverage

to complete a more favorable distribution agreement with the MVPDs.46

Table 7 shows that, despite the dominance of the four major broadcast

networks, at least a dozen cable networks have succeeded in attracting more than

See, for example, Linda Moss and Mike Farrell, “Dueling for Dollars,” Multichannel

Newswire, March 5, 2007, available at [http://www.multichannel.com/index.asp?layout=

articlePrint&articleid=CA6421302], viewed on June 27, 2007, which includes a discussion

of how broadcasters have used timing to their negotiating advantage.

Id.

CRS-27

25% of all television households for at least one 10-minute segment each week. Not

surprisingly, these cable networks generally have been able to command larger than

average per subscriber fees from MVPDs, as shown in Table 9. Those networks

commanding high per subscriber license fees that did not have broad reach into

households tended to fall into one of two categories — sports networks or news

networks — that have unique demand characteristics.47

Table 9. The Advertiser-Supported Cable Networks with the

Highest Average License Fees Per Subscriber Per Month, 2005

Network

Monthly Fee

Network

Monthly Fee

ESPN

2.60

Discovery

0.24

Fox Sports

1.68

ESPN2

0.23

TNT

0.86

AMC

0.22

Disney Channel

0.78

ABC Family

0.22

USA

0.45

A&E

0.21

CNN

0.44

Golf Channel

0.21

Nickelodeon

0.40

Independent Film

0.21

NBA TV

0.34

Lifetime

0.21

Sundance

0.29

Fox Soccer

0.20

TBS

0.29

0.19

Turner Classic Movies

0.28

NFL Network

0.19

MTV

0.28

Natl. Geographic

0.19

0.27

Spike TV

0.18

Fox News

0.25

History Channel

0.18

CNBC

0.25

Source: Kagan Research, Economics of Basic Cable Networks, 2006, 12th Annual Edition,

2005, at p. 58.

The proliferation of program networks may be having another market impact.

In the early and mid 1990s, the average U.S. television household received 41

channels; with the lesser audience fragmentation that existed then, a larger proportion

of networks could expect to capture enough audience share to be profitable. The key

strategic element was to gain a threshold penetration level on basic cable tiers. With

such penetration, there was a reasonable chance to become profitable. Thus one

strategy attractive to large programmers whose existing programming had already

gained some brand identity was to introduce additional program networks under the

For example, in an interview that appeared in the May 7, 2007 edition of Broadcasting

& Cable (at pp. 14-16), Jim Bewkes, president and chief operating officer of Time Warner,

stated that about half of CNN’s viewers do not watch any other television, “so if you’re

trying to reach that audience, you want to reach them there.”

CRS-28

corporate brand umbrella, such as Disney, Discovery, ESPN, or Fox. Since then, the

increase in the number of channels available to households and continued

competitive entry by new program networks has resulted in more and more video

networks being only marginally profitable; most program networks do not generate

revenues in excess of production costs and the likelihood of a new program network

proving very popular and profitable is diminishing. This may be constraining the

incentive, which has been strong in the past, of large programmers to introduce

additional program networks, sometimes even when they can use their entrenched

successful networks to cross-market their new networks.48 Thus, although it has been

common for distributors to compensate a programmer for carriage of that

programmer’s popular programming by agreeing also to carry the programmer’s new

program networks, that is becoming a less attractive form of compensation unless the

programmer has an extremely strong brand identity to exploit. It appears that

increasingly a more attractive alternative is for the programmer to extract the value

from its popular programming directly, by demanding cash payment from distributors

for carriage of that popular programming.

Audience fragmentation also appears to be affecting the relationship between

the large broadcast networks and their affiliated broadcast stations. Traditionally,

under the network-affiliate contracts, the networks assumed the retransmission

consent rights of their affiliates, in exchange for making cash payments to the

affiliates. The broadcast networks then typically negotiated retransmission consent

agreements in which the MVPDs agreed to carry new, or less popular, cable program

networks owned by the broadcast networks (for example, MSNBC or ESPN Classic)

as partial compensation for carrying the broadcast network. Recently, the broadcast

networks seem to be changing their business strategy, giving back to their affiliate

broadcast stations the right to negotiate retransmission consent compensation from

MVPDs in exchange for reducing or eliminating the cash payments they make to

their affiliate stations. According to a report in Multichannel Newswire:

And during the past several years, the “Big Four” networks have renegotiated

affiliate deals to eventually eliminate once-lucrative network compensation fees

paid to stations to carry programming from ABC, CBS, Fox, and NBC.

Perhaps not coincidentally, those fees began to decline precipitously in 2005,

right around the time that retransmission consent revenue [for the affiliate

stations] began to rise. For example, in 2005, network compensation at HearstArgyle fell 35.9% from $28.8 million to $19.1 million and dipped another 48.7%

in 2006 to $9.8 million.

At Nexstar, network compensation dipped 22.4% in 2005, to $6.6 million, and

fell 36.4% to $4.2 million in 2006. At Sinclair, the drop-off was less dramatic

— 7% in 2005, from $14.3 million to $13.3 million (the company has not yet

However, despite the fact that most advertising-supported cable network are not able to

command substantial per subscriber fees from MVPDs, in The Economics of Basic Cable

Networks, 2006, 12th Annual Edition, 2005, at p. 3, Kagan Research concluded:

There’s no question why so many want to enter this business — the economics

are very attractive if one is successful. The industry posted an estimated $9.0

billion in cash flow in 2004, with an enviable margin of 34.1%.

CRS-29

released 2006 network compensation) — but the station owner expects more

dramatic declines in the coming years.

In its 2005 annual report, Sinclair even went so far as to say that retransmission

consent fees have “replaced the steady decline in revenues from television

network compensation.”49

The trend toward greater program network proliferation and fragmented

audiences is complicated by several significant technologically-driven forces. During

the transition from analog to digital technology, programmers of both cable networks

and broadcast networks are trying to get MVPDs to carry their programming in both

analog and digital format — and to carry their digital programming in high definition

as well as standard format. Thus, a single program network now might seek multiple

channels on an MVPD system to offer analog, digital, and high-definition feeds. At

the same time, the deployment of digital technology is allowing broadcasters to

provide multiple digital signals (that is, multiple video programs) on their licensed

spectrum, not just a single signal. A broadcaster that previously provided

programming for one channel on an MVPD system now may seek multiple channels,

which, depending on how the FCC ultimately implements the must-carry and

retransmission consent rules in a multicast digital environment, could result in a

larger portion of an MVPD’s system being set aside exclusively for broadcast

program networks. Whether these technological changes strengthen the negotiating

positions of programmers or distributors may well depend almost entirely on how the

FCC, or Congress, adopts the must-carry and retransmission consent rules for this

new environment. In the short run, however, to obtain carriage of multiple signals

in their retransmission consent negotiations with MVPDs, broadcasters may have to

compromise on other objectives, such as higher cash payments.

Cable System Revenue is Growing From High Speed Internet

Access and Telephone Services

Most cable operators have upgraded their systems over the past decade and now

are able to offer a wide array of services over their broadband networks, including

high speed data, telephone, and digital video services, as well as traditional analog

video services. As shown in Table 10, the revenue base of the cable system

operators is diversifying, with fastest growth occurring in high speed data, telephone,

and digital tier video services. Most subscribers who select these newer services

purchase them as part of a bundled package with basic cable service. This trend is

helping cable operators in their negotiations with programmers in two ways. First,

subscribers who purchase service bundles are less likely to switch to a competing

MVPD if their current provider were to lose carriage of a particular program network,

even a popular network. This is particularly the case if the competing MVPD cannot

offer the full array of services that the cable company does; for example, satellite

companies often cannot offer high speed data and telephone services at a price or

uplink speed that is competitive with cable companies. Second, if a cable company

Linda Moss and Mike Farrell, “Dueling for Dollars,” Multichannel Newswire, March 5,

2007, available at [http://www.multichannel.com/index.asp?layout=articlePrint&articleid=

CA6421302], viewed on June 27, 2007.

CRS-30

is enjoying rapid revenue growth from non-video services, it may be more willing to

hold the line in its negotiations with programmers because it is easier to absorb a

potential loss of video revenues stemming from an impasse and loss of program

carriage when other revenues are growing. On the other hand, the additional

revenues generated by these “triple play” offerings may allow a cable operator to pay

more for programming.

Table 10. Cable Company Revenues, by Service,

1996-2005, in Millions of Dollars

Year

Basic

Service

Premium

Channels

Digital

Tier

High

Speed

Data

Telephone

Service

Net Local

Advertising

Miscellaneous

1996

18,249

4,359

—

1,413

1,894

1997

20,213

4,616

—

1,636

2,164

1998

21,574

4,858

103

1,898

2,333

1999

22,732

5,025

443

386

2,267

2,850

2000

24,142

5,259

588

751

275

2,447

2,968

2001

26,324

5,756

1,763

1,870

713

2,431

3,049

2002

27,690

5,963

2,693

4,525

1,265

2,800

3,359

2003

29,000

5,891

3,396

6,772

1,499

2,851

4,237

2004

30,080

6,225

3,966

8,965

1,623

3,236

5,091

2005

31,075

6,389

4,563

11,245

2,158

3,381

6,514

Source: Kagan Research, Broadband Cable Financial Databook, 26 Edition, 2006, at p. 8.

Miscellaneous revenues include commercial revenue, pay-per-view, advanced analog, home shopping,

equipment charges, home networking, pay installation, NVOD, VOD/SVOD, interactive, games,

DVRs, and high definition services.

There has been an interesting market response to the growth in cable system

revenues from non-video services. As these new revenue sources have increased the

average revenue generated per subscribing household (known in the industry as

average revenue per unit, or ARPU), the value of existing cable systems has grown

and this has been reflected in the price per subscriber at which cable systems have

been sold. This, in turn, has affected at least one programmer-distributor negotiation.

On July 1, 2006, Suddenlink Communications completed the purchase from Charter

Communications of cable systems in West Virginia with 240,000 subscribers,

200,000 of whom live in the Charleston, WV service area of a Sinclair Broadcast

Group-owned television station (WCHS, an ABC affiliate) and another television

station (WVAH, a Fox affiliate) for which Sinclair has a local marketing agreement.

The retransmission consent agreement between Charter and Sinclair had expired

prior to the Suddenlink purchase,50 so Suddenlink entered retransmission consent

See Mike Farrell, “Suddenlink, Sinclair in Retrans Clash,” Multichannel News, July 5,

2006, available at [http://www.multichannel.com/index.asp?layout=articlePrint

(continued...)

CRS-31

negotiations with Sinclair before the purchase was completed. Sinclair had sought

$4 million in cash payments over three years. But when Sinclair learned that the

purchase price was $800 million, it raised its demand to more than $42 million.

Sinclair’s vice president and general counsel reportedly stated that, “If they’re paying

$3,200 per sub[scriber], why shouldn’t a piece of that be coming to us?”51 This

raises an interesting issue. To the extent the high cable system valuation is a function

of the programming provided by Sinclair, Sinclair would seem to have a strong claim

for larger cash payments. But to the extent the valuation is not related to Sinclair’s

programming, if Sinclair were nonetheless able to command larger cash payments

that might suggest that the current retransmission consent process may be allowing

programmers to siphon off funds that might, from a public policy perspective, be

better left to cable operators to expand their broadband infrastructure capabilities.

Specific Examples

of Programmer-Distributor Conflicts

As early as 2005, broadcasters announced their intentions to receive cash

payments from MVPDs for retransmission of their broadcast signals that are

comparable to the payments MVPDs make for cable program networks.52 It

generally has not been the mega-programmer broadcast networks (that also own cable

networks) that have been most aggressive in the pursuit of cash payments; rather it

has been the larger non-network station groups (such as Sinclair, Nexstar, and Belo)

and the lone broadcast network that no longer has cable network interests (CBS was

spun off from Viacom in 2005, with the latter retaining such cable networks as

MTV). In the past two years, despite the confidentiality under which contracts are

negotiated, parties have frequently reported to the trade press the difficulties they

were having in their on-going negotiations. This section does not attempt to provide

an exhaustive recitation of recent programmer-distributor conflicts. Rather, it

presents five exemplary cases in an attempt to reflect how the market currently is

operating and explore the factors (including federal rules) that tend to influence

negotiations.

Nexstar: The First Broadcaster to Aggressively Seek

Cash Payments for Retransmission Consent

In January 2005, Nexstar Broadcasting Group, which owns and operates 27

stations in medium sized markets, and provides management, sales, and other

services to an additional 15 stations owned by Mission Broadcasting, sought a

monthly 30 cents per subscriber cash payment fee from Cox Communications and

(...continued)

&articleID=CA6349903], viewed on June 27, 2007.

Mike Farrell, “Suddenlink in Retrans Row,” Multichannel News, July 10, 2006, at p. 8.

See, for example, Linda Moss, “MSOs See Rough Road to Retransmission Deals,”

Multichannel News, July 25, 2005, at p. 1, and Tania Pancyk-Collins, “Viacom Plans

Carriage Fees for CBS Programming,” Communications Daily, September 16, 2005, at p.

CRS-32

Cable One (the fourth and tenth largest cable operators, respectively), for the right

to retransmit the signals of each of the Nexstar/Mission broadcast stations in the Cox

and Cable One franchise areas. Cox filed a complaint with the FCC on January 19,

2005, alleging that Nexstar and Mission refused to budge from their cash demands

and therefore had not negotiated in good faith.53 Cox alleged that Nexstar was

demanding that Cox pay $8.9 million for the next three years “for the privilege of

retransmitting the signals of 5 television stations that are free over-the-air in these

communities.” Cox sought an expedited Commission order setting relief and

sanctions and requiring that the parties resume negotiations.54 Nexstar responded that

Cox was refusing to consider making any cash payments.55

When it filed the petition, Cox had already been required to discontinue carrying

KLST, the CBS affiliate in San Angelo, TX, and KRBC, the NBC affiliate in

Abilene, TX, on Cox cable systems with 72,500 customers, and if there were no

agreement by the end of January 2005, Cox systems with 45,230 customers would

be forced to stop carrying KSNF, the NBC affiliate in Joplin, MO, KODE, the ABC

affiliate in Joplin, and KTAL, the NBC affiliate in Shreveport, LA-Texarkana, TX.

When it had to discontinue carriage of the broadcast stations, Cox provided the HBO

Family networks in their place.

Nexstar had grown rapidly through acquisitions earlier in the decade, but lost

more than $140 million between 2001 and 2005 and was trying to pay down $600

million in debt, which was greater than its revenues over those four years.56

Nexstar’s chief operating officer, Duane Lammers, reportedly stated that his company

faced costs associated with the digital transition and if cable companies take his

stations’ signals and resell them to viewers, “it’s only fair we get a piece.”57

On February 2, 2005, Cox prevented the loss of carriage of the two Joplin, MO

broadcast stations for which the retransmission agreement had expired by using a

“management reorganization” that combined the Missouri systems with Kansas

systems and folded them into a retransmission agreement for its Kansas cable

systems.58 But Cox did lose carriage of Nexstar’s KTAL station in ShreveportTexarkana on February 1, 2005. Moreover, Bossier City, LA City Attorney James

After the fact, the Nexstar position was described in Broadcasting & Cable as “a take-itor-leave-it demand: Pay 30¢ monthly per subscriber, or we’ll yank our signals.” See John

M. Higgins, “Cable, Broadcast Battles End,” Broadcasting & Cable, February 6, 2006,

available at http://www.broadcastingcable.com/index.asp?layout=articlePrint&article

ID=CA6304947], viewed on June 27, 2007.

Anne Veigle, “Cox Asks FCC to Order Nexstar to Retransmission Negotiating Table,”

Communications Daily, January 21, 2005, at pp. 4-5.

“Mass Media Notes,” Communications Daily, February 2, 2005, at p. 9.

“Texas broadcaster pulls stations off cable,” BroadcastEngineering, January 23, 2005,

available at [http://broadcastengineering.com/news/texas-cable-broadcaster-20050123/],

viewed on June 27, 2007.

Id.

Anne Veigle, “Cox Maneuver Puts TV Stations Back on Cable,” Communications Daily,

February 3, 2005, at pp. 4-5.

CRS-33

Hall sent Cox a letter threatening legal action unless KTAL were restored to cable

carriage, claiming that not providing KTAL “is a violation of the franchise agreement

between the City of Bossier City and Cox Communications.”59

The dispute in Joplin also involved Cable One, which lost carriage of the two

Nexstar broadcast stations on January 1, 2005. The dispute benefitted satellite

operators, who reported a big upsurge in service orders; Express Cellular & Satellite

in Joplin reported an increase from approximately four installations a day to 20.60

Both Cable One and Cox responded to the lost carriage of the Nexstar broadcast

stations by holding special events at which they gave away old fashioned “rabbit-ear”

television antennas that would allow their subscribers to receive the Nexstar signals

free over-the-air. Cox said it handed out 800 antennas in Abilene, TX, and 2,800 in

San Angelo, TX. Cox also said that it had lost 1,000 subscribers (out of a total of

105,000 subscribers) during the period the Nexstar stations — all affiliates of major

broadcast networks — were removed from its cable systems.61

According to the trade press, with the loss of cable carriage, Nexstar stations’

ratings plunged and their advertising revenues fell accordingly.62 Nexstar

acknowledged losing several million dollars in revenues. With all three parties

harmed by the impasse, after 10 months, on October 20, 2005, Cox, Nexstar and

Mission signed a retransmission consent agreement for analog and digital carriage

rights, covering 12 Nexstar and 9 Mission station serving Abilene-Sweetwater, San

Angelo, Lubbock, Amarillo, Odessa-Midland, and Beaumont-Port Arthur, TX,

Shreveport, LA, Fort Smith, Little Rock, and Monroe-El Dorado, AK, Springfield

and Joplin, MO, and Pittsburg, K63S. The agreement allowed Cox to again carry

KLST/CBS in San Angelo; KTAL/NBC in Bossier City and Minden, LA, and in

Magnolia, AK and Mt. Pleasant, TX; and KRBC/NBC (a Mission station) in Abilene,

Sweetwater, and Snyder, TX. These stations had been removed from the Cox lineup

in January 2005.

The FCC did not act upon the Cox complaint during the 10 months that the

negotiating impasse resulted in the Nexstar stations not being carried on the Cox

systems. When the new retransmission consent agreement was reached, the FCC

dismissed the complaint as moot.

The terms of the retransmission consent agreement between Cox and Nexstar

were not disclosed, but industry executives say Cox and Cable One did not pay the

straight license fees Nexstar was demanding; rather they agreed to buy a certain

Id.

“Cox Tries a Rabbit Punch,” Broadcasting & Cable, February 21, 2005, at p. 8.

John M. Higgins, “Cable, Broadcast Battles End,” Broadcasting & Cable, February 6,

2006, available at [http://www.broadcastingcable.com/index.asp?layout=articlePrint&article

ID=CA6304947], viewed on June 28, 2007.

“Cox Communications, Nexstar Broadcasting and Mission Broadcasting Reach

Retransmission Consent Agreement,” Business Wire, October 20, 2005.

CRS-34

amount of advertising on the Nexstar broadcast stations.64 But smaller cable

operators appear to have capitulated to Nexstar’s willingness to go dark. At the end

of 2005, Nexstar reached a number of retransmission consent agreements with these

smaller cable operators that Nexstar said included cash payments. DBS operators

already had agreed to make cash payments because they needed the local broadcast

signals to be able to compete with cable. In February 2006, Nexstar CEO Perry Sook

said the company expected to collect around $12 million per year from its recent

round of negotiations with cable and DBS operators.65 It was estimated that 15 to

20% of those revenues came from satellite companies and about 30% of those

revenues were in the form of payments for advertising.

Nexstar reported a huge increase in retransmission consent revenues from cable

and satellite companies in 2006. CEO Sook reportedly said these revenues were

$13.7 million in 2006, nearly five times the $2.8 million the broadcaster recorded in

2005.66 Of that 2006 revenue, $8.7 million was cash compensation and $5 million

was from advertising agreements. The revenues came from agreements struck with

150 cable operators, DISH Network, DirecTV, and all the overbuilders in its

territories. Sook said the company expects these revenues to increase in 2007 from

agreements with telephone companies, the expansion of the satellite local-into-local

service, and escalator clauses in existing agreements with cable operators. He said

many existing Nexstar retransmission consent agreements expire in 2008 and 2009,

which will provide an opportunity to further increase retransmission consent

revenues then.

Nexstar appears to have succeeded in its strategy of suffering short-term

advertising revenue losses in order to create the precedent of obtaining cash payments

from MVPDs for carriage of its broadcast signals. It is possible that this strategy

could work because there was little overlap between the mid-sized cities it served and

the generally larger cities served by the two most formidable cable companies —

Comcast and Time Warner.

John M. Higgins, “Cable, Broadcast Battles End,” Broadcasting & Cable, February 6,

2006, available at [http://www.broadcastingcable.com/index.asp?layout=articlePrint&article

ID=CA6304947], viewed on June 28, 2007.

John M. Higgins, “Cable, Broadcast Battles End,” Broadcasting & Cable, February 6,

2006, available at [http://www.broadcastingcable.com/index.asp?layout=articlePrint&article

ID=CA6304947], viewed on June 28, 2007.

Mike Farrell, “Nexstar: Retrans Revenues Up,” Multichannel News, March 1, 2007,

available at [http://multichannel.com/index.asp?layout=articlePrint&articleID=CA6420695],

viewed on April 20, 2007.

CRS-35

CBS: The Only Major Broadcast Network to Aggressively

Seek Cash Payments for Retransmission Consent

In 2005, when it still owned the CBS and UPN networks but had already

announced plans to spin off its broadcast assets, Viacom publicly announced its

intention to obtain the same retransmission fees from cable operators for carriage of

its broadcast networks as it received for carriage of its USA cable network; this

would have made it the first broadcast network owner to receive cash payments.67

Industry observers indicated that CBS might be able to do this because in its

retransmission consent negotiations, post-spin off, when it no longer had cable

program networks, it would not have to consider the impact of pushing for cash

payments for its broadcast network on its ability to obtain carriage and cash for its

cable networks. (During the period, it was public knowledge that MTV, which is

owned by Viacom, wanted to introduce several new MTV-branded cable networks.)

Industry observers also indicated that if CBS were to succeed, this might set a

precedent that would help non-network station groups, such as Gannett, Tribune, and

Belo, in their retransmission consent negotiations, but would have less impact on the

negotiations involving the other major broadcast networks, which still have cable

networks.

A number of larger cable operators — Charter, Cox, Insight, and Time Warner

— publicly responded that they would not pay cash for broadcast carriage, though

some did not rule out the possibility of non-cash payments.68 (The largest cable

operator, Comcast, had signed a long-term carriage contract with Viacom at the end

of 2003, and thus would not have been affected by the Viacom proposal.) The cable

operators argued that the broadcast networks continue to lose audience share and

therefore could not demand cash payments, and also that broadcasters were given

spectrum for free and that cable companies should not have to pay for broadcast

signals that customers can get off the air for free. CBS argued that its broadcast

network audience share continued to far exceed that of any cable network and

MVPDs should pay for any programming that they provide their subscribers.

In early March 2006, CBS president Leslie Moonves predicted that CBS would

eventually get “hundreds of millions of dollars” from retransmission consent

agreements covering the 60 million households reached by the CBS and CW stations

owned and operated by CB69S. Later that month, CBS successfully negotiated its first

retransmission consent agreement involving cash payments — with Verizon, the new

telephone company entrant into the MVPD industry, for carriage of CBS’s ownedand-operated stations. Although the terms were not announced, industry sources said

they were “similar to Hearst-Argyle’s recent breakthrough agreement with DBS

See, for example, “Mass Media Notes,” Communications Daily, June 7, 2005, at p. 9, and

Tania Panczyk-Collins, “Viacom Plans Carriage Fees for CBS Programming,”

Communications Daily, September 16, 2005, at p. 7.

Jonathan Make, “Cable Won’t Pay Cash for Carriage, Despite Viacom Demands,”

Communications Daily, September 19, 2005, at pp. 3-4.

John Eggerton, “Moonves Sees Nine-Figure Retrans Pot,” Broadcasting & Cable, March

6, 2006, at p. 27.

CRS-36

service Echostar” under which Echostar (DISH Network) paid 50 cents per month

for each of its subscribers in the station group’s markets.70

In February 2007, CBS announced that it had successfully negotiated

retransmission consent agreements with cash payment provisions with nine small

cable operators, covering a total of one million cable television subscribers who can

watch CBS owned-and-operated stations.71 But CBS provided no public

confirmation of the exact amount of cash being paid by the cable companies, or even

of the identities of the cable companies, citing confidentiality provisions in the

agreements. Industry observers had differences of opinion on the terms of the

agreements; some thought CBS was receiving 50 cents per subscriber per month ($6

million per year), or even more, while others thought some of the compensation was

in the form of barter advertising time. Wall Street analysts estimated that cash

payments of 50 cents per subscriber per month could generate between $155 million

and $240 million in annual revenues for CBS. A Bank of America report, however,

stated that “the market value for broadcast retransmission rights won’t really be

determined until CBS’s agreements with the largest cable operators come up for

renewal starting in ‘09-‘10.”72

DISH Network/Lifetime/Hearst-Argyle: An Example of the

Complexity of Programmer-Distributor Negotiations

DISH Network has attempted to differentiate itself from other MVPDs in part

by being the low-price provider, offering packages at lower prices than its

competitors, though sometimes not offering on its more basic tiers certain high-cost

networks that are provided on its competitors more basic tiers.73 (In contrast,

DirecTV has differentiated itself in part by having the most sports programming,

including some sports programming for which it is the exclusive provider.) Given

John M. Higgins, “Money Talks: CBS Braces for Cable Showdown,” Broadcasting &

Cable, March 27, 2006, at p. 10. See the discussion of the DISH Network/Lifetime/HearstArgyle negotiations in the next section of this report.

Linda Moss, “CBS Eyes New Deals,” Multichannel News, February 26, 2007, at p. 3.

See Linda Moss, “CBS Eyes New Deals,” Multichannel News, February 26, 2007, at p.

3, and also Michael Malone, “CBS Demands — And Gets — Cash,” Broadcasting & Cable,

February 26, 2007, at p. 43.

One of the key elements in programmer-distributor negotiations is the tier that the

network(s) will be placed on. Most MVPDs offer several tiers — a most basic tier with

perhaps 60 program channels, and progressively higher-priced tiers with perhaps 120 and

180 program channels. Programmers, of course, typically seek placement of their networks

on the most basic tier, which will be purchased by the most households and thus generate

higher revenues in the form of greater per subscriber fees and more advertising revenues.

Industry analysts and the trade press often report the subscriber levels for each of these tiers,

but rarely agree on those particular levels. The discussion in this section cites a number of

different sources with inconsistent subscriber figures and thus there are some

inconsistencies about the gain or loss in subscribers as a particular network is moved from

one tier to another. This section seeks to show the general impact of a change in tier, not

to present a quantitative impact calculation, and thus accepts those inconsistencies.

CRS-37

its business strategy, DISH Network has had more carriage disputes than other

MVPDs with programmers that have sought to raise per subscriber charges.74

On December 31, 2005, DISH Network removed the Lifetime and Lifetime

Movie networks, which target women audiences, from the DISH Network “top 60”

package (its most basic package, variously estimated to have 11 million or 12 million

subscribers) over a carriage dispute. DISH Network and Lifetime each alleged that

the other was making unreasonable demands in their negotiations and then publicly

distorting and mischaracterizing the other’s most recent offer.75 Lifetime’s press

release included quotes of concern from non-profit organizations that serve women

and partner with Lifetime. DISH Network claimed that its contractual arrangements

with 180 networks had been scheduled to expire on December 31, 2005, but it only

experienced an impasse in re-negotiations with Lifetime.76 DISH Network also

claimed that it wanted to return the Lifetime network to DISH Network, but not at

the 76% price increase it alleged Lifetime was seeking. Lifetime claimed it was

seeking a much smaller price increase. Lifetime was the fourth-most-viewed

advertising-supported cable network in the fourth quarter of 2005.

To replace the Lifetime networks, DISH Network temporarily carried

Cablevision’s WE:Women’s Entertainment network on the channel it had used for

Lifetime and the Encore Love Movie network on the channel it had used for the

Lifetime Movie network. In mid-January 2006, DISH Network worked out a carriage

arrangement with Oxygen Media, another network targeting women audiences, to fill

the channel slot previously held by Lifetime Movie network on DISH Network’s “top

120” package, which is received by an estimated 9 or 10 million DISH Network

subscribers. This appeared to be a straight-forward contractual impasse between an

MVPD and a cable programmer — with DISH Network risking losing subscribers

For example, in addition to the dispute with Lifetime described in this section, DISH

Network has had a highly publicized dispute with Court TV. When renegotiating carriage

terms for the period beginning January 1, 2007, DISH Network sought to move Court TV

from its “top 60” tier, which one observer estimated to have 11 million subscribers, to its

“top 120” tier, which was estimated to have only 8 million subscribers. Court TV responded

by seeking a 70% increase in its per subscriber fee. DISH Network refused to pay the higher

fee and removed Court TV from its tier, replacing it with The Biography Channel. On

February 9, 2007, DISH Network and Court TV announced a new carriage agreement under

which Court TV was carried on DISH Network’s “top 120” tier, but other terms of the

agreement were not disclosed. See Linda Moss, “Dish Drops Court TV from Lineup,”

Multichannel News, January 8, 2007, at p. 40, and Linda Moss, “Court TV Returns to Dish

Network,” Multichannel Newsline, February 9, 2007, available at

[http://www.multichannel.com/index.asp?layout=articlePrint&articleID=CA6415345],

viewed on June 28, 2007. In recent years, DISH Network has also been involved in carriage

disputes with OLN (now Versus) and Viacom. See Linda Moss and Mike Reynolds, “Dish

Sets a Date: Feb. 1,” Multichannel News, January 29, 2007, at p. 3.

Anne Becker, “Lifetime, Echostar Carriage Dispute Rages,” Broadcasting & Cable,

January 4, 2006, available at [http:www.broadcastingcable.com/index.asp?layout=article

Print&articleID=CA6296491], viewed on June 28, 2007.

Adrianne Kroepsch, “EchoStar Pulls Plug on Lifetime After Failed Carriage

Negotiations,” Communications Daily, January 4, 2006, at p. 3.

CRS-38

to DirecTV and cable operators and Lifetime losing revenues as Oxygen takes

advantage of the gap in women’s networks in the DISH Network line-up.

But, as described in several trade press news analyses, in fact the negotiating

mechanics were more complex.77 Lifetime is 50% owned by Hearst Corp., the

controlling shareholder of Hearst-Argyle Television, which owns 28 broadcast

television stations. Hearst-Argyle therefore had the right to negotiate retransmission

consent agreements with the cable and satellite companies operating in those local

broadcast markets; there were about 16 million television households in those local

markets, approximately 14 million of which subscribed to MVPDs. But HearstArgyle traditionally had made Lifetime its “agent” in the retransmission consent

negotiations with the MVPDs, and in those negotiations Lifetime had successfully

secured carriage of, and higher cash payments for, the various Lifetime cable

networks — rather than seeking cash payments from the MVPDs for carriage of the

Hearst-Argyle broadcast signals. In exchange, Lifetime compensated Hearst-Argyle

$1.8 million in 2004 and $5 million in the first nine months of 2005, or

approximately 4 cents per month for each MVPD subscriber in the local markets

served by Hearst-Argyle broadcast stations.

However, instead of continuing to use Lifetime as its retransmission consent

agent in its negotiations with DISH Network, just as the December 31, 2005 deadline

was approaching, Hearst-Argyle itself undertook retransmission consent negotiations

directly with DISH Network, and accepted DISH Network’s offer of $11 million a

year to carry the Hearst-Argyle broadcast stations to DISH Network’s 1.8 million

subscribers in the Hearst-Argyle markets.78 This represented approximately 50 cents

per subscriber per month, more than 10 times what Hearst-Argyle had been receiving

from Lifetime. But it meant that Lifetime would have to negotiate its own carriage

agreement with DISH Network, without the leverage of being able to deny DISH

Network access to the Hearst-Argyle broadcast programming if an agreement were

not reached.

For its part, DISH Network appears to have believed it was in its financial

interest to break tradition and make a cash payment to Hearst-Argyle on the

expectation that it would save more than that amount in its negotiations with

Lifetime. Presumably it believed that Lifetime, if forced to negotiate carriage on its

own outside the context of retransmission consent negotiations, would lack market

leverage and would have to accept a lower cash payment, since its programming,

although popular, does not represent the sort of must-have programming whose

absence would lead to significant desertion by DISH Network subscribers. A

See John M. Higgins, “Money Talks: Deal of a Lifetime,” Broadcasting & Cable,

January 16, 2006, at p. 17, and Mike Reynolds, “Hearst Key to Lifetime-Dish,”

Multichannel Newswire, February 2, 2006, available at [http://www.multichannel.com/

index.asp?layout=articlePrint&articleid=CA6303719], viewed on June 28, 2007.

This apparently had not been announced publicly, but rather reported in a December 30,

2005 8-K filing that Hearst-Argyle made to the Securities and Exchange Commission. See

Mike Reynolds, “Hearst Key to Lifetime-Dish,” Multichannel Newswire, February 2, 2006,

available at [http://www.multichannel.com/index.asp?layout=articlePrint&articleid

=CA6303719], viewed on June 28, 2007.

CRS-39

Broadcasting & Cable analyst concluded that if DISH Network could succeed in

obtaining a reduction of 8 cents per month in cash payments to Lifetime for all 11 or

12 million DISH Network subscribers that would more than make up for a net

increase of 46 cents per month in cash payments to Hearst-Argyle for the 1.8 million

DISH Network subscribers located in local markets served by Hearst-Argyle

broadcast stations.79 But this raised a strategic market question that was widely

discussed in the trade press: would DISH Network lose, nonetheless, because it had

set the precedent of paying cash for carriage of a broadcast network?

In any case, DISH Network could not accomplish its objective if it made cash

payments to Hearst-Argyle and also agreed to a higher — rather than lower —

payment to Lifetime, so an impasse with Lifetime may have been inevitable, even if

Lifetime only sought a nominal price increase.

A month later, on February 1, 2006, Lifetime was back on DISH Network’s “top

60” tier.80 In an amended submission to the Securities and Exchange Commission,

dated January 31, 2006, Hearst-Argyle stated that it had revoked its December 2005

agreement with DISH Network and instead signed a “replacement agreement” that

was “substantially similar to the previous contract,” except that DISH Network

would not pay Hearst-Argyle cash consideration. Hearst-Argyle also indicated that

it amended its compensation agreement with Lifetime — apparently with Lifetime

(instead of DISH Network) compensating Hearst-Argyle for the value of the

retransmission consent rights in the negotiations, around $11 million. That is, DISH

Network would pay Lifetime an unstated amount for carriage of the Lifetime cable

networks and Hearst-Argyle broadcast networks, and then Lifetime would pay

Hearst-Argyle $11 million. In this fashion, DISH Network could claim it was no

longer making cash payments to Hearst-Argyle, even though in effect it was paying

Hearst-Argyle for carriage of the broadcast signals. There was no public

announcement of how much DISH Network was paying Lifetime, thus fostering

debate in the trade press whether DISH Network had been able to reduce the payment

to Lifetime sufficiently to make up for the $11 million payment that flowed through

from DISH Network to Lifetime to Hearst-Argyle.81

John M. Higgins, “Money Talks: Deal of a Lifetime,” Broadcasting & Cable, January

16, 2006, at p. 17.

Mike Reynolds, “Hearst Key to Lifetime-Dish,” Multichannel Newswire, February 2,

2006, available at [http://www.multichannel.com/index.asp?layout=articlePrint&articleid

=CA6303719], viewed on June 28, 2007. As explained earlier, there is inconsistency in the

trade press about the number of subscribers receiving the various DISH Network packages.

The Reynolds article refers to unnamed sources that estimated that the “top 60” package

only reaches 8.5 million subscribers, but given that it is the most basic DISH Network

offering, that the same sources estimated there are 7.8 million subscribers to DISH

Network’s “top 120” offering, and that DISH Network has in total 13 million subscribers,

the 8.5 million estimate appears to be low.

See John M. Higgins, “Money Talks: Cable, Broadcast Battles End,” Broadcasting &

Cable, February 6, 2006, at p. 10, and Linda Moss, “DirectTV’s Turn to Fork Over

Documents,” Multichannel Newswire, November 29, 2006, available at

[http://www.multichannel.com/index.asp?layout=articlePrint&articleid=CA6395717],

(continued...)

CRS-40

Although DISH Network again carried the Lifetime Movie Network, it was

placed in the “top 180” package, with an estimated 4.5 million subscribers, rather

than the “top 120” package, with an estimated 7.8 million subscribers. Also, as a

result of the dispute, Oxygen, Lifetime’s strongest competitor in the market for

women’s programming, was able to secure long-term carriage on DISH Network’s

“top 120” package.

It appears that neither DISH Network nor Lifetime benefitted from this

retransmission consent impasse. Despite the modified agreement, DISH Network

gave the appearance of setting a precedent by paying cash for broadcast signals and

also reinforced its image as an MVPD that periodically failed to reach a carriage

agreement without first removing programming from its tiers. Lifetime, by letting

its networks be removed from a major MVPD’s tier, gave its closest competitor,

Oxygen, an opening onto that major MVPD’s tier.

This dispute, and its resolution, had another market impact. In 2006, DirecTV

filed a breach of contract suit against Lifetime, alleging that Lifetime reneged on a

deal to pay $200 to DISH Network subscribers who switched over to DirecTV during

the Lifetime-DISH Network impasse.82 Lifetime subsequently filed a countersuit

against DirecTV, which had been withholding license fees from Lifetime. In this

panoply of suits, DirecTV alleged that Lifetime violated a most-favored-nation clause

in their carriage contract in that DISH Network ultimately paid what amounts to a

lower license fee, or effective rate, for Lifetime programming than DirecTV. Thus,

the DISH Network-Lifetime dispute eventually affected DirecTV-Lifetime

negotiations.

Sinclair’s Negotiations with Various MVPDs:

A Case Study of Factors Affecting Negotiating Strength

Sinclair Broadcast Group perhaps has been the most aggressive of all broadcast

companies seeking cash payments for retransmission consent. Its negotiations with

a number of MVPDs have received wide coverage in the trade press.

Sinclair-Mediacom.

This has been the “poster child” of difficult retransmission consent negotiations

played out in public, and has involved federal regulatory agencies, state legislatures,

courts, and Members of Congress. Sinclair Broadcast Group owns or is otherwise

involved in the operations83 of 58 television stations (more than any other U.S.

(...continued)

viewed on June 28, 2007.

Linda Moss, “DirectTV’s Turn to Fork Over Documents,” Multichannel Newswire,

November 29, 2006, available at [http://www.multichannel.com/index.

asp?layout=articlePrint&articleid=CA6395717], viewed on June 28, 2007.

By providing programming and operating services pursuant to local marketing agreements

or by providing sales services pursuant to outstanding agreements.

CRS-41

broadcast company) in 36 markets, with a mid-size market focus.84 It owns and

operates two or more stations in 11 of those markets. Nineteen of its stations are

affiliated with Fox, 17 with MyNetworkTV, 10 with ABC, 9 with the CW, 2 with

CBS, and 1 with NBC. Sinclair’s stations reach approximately 13% of all U.S.

households. Mediacom, the eighth largest cable television company in the U.S.,

served 1.38 million basic cable subscribers in 23 states, and 105,000 telephone

customers, as of December 31, 2006.85 It primarily serves non-metropolitan areas.

Retransmission consent negotiations between Sinclair and Mediacom began in

the fall of 2005, while the two companies were still operating under an existing

month-to-month retransmission consent agreement that allowed either party to

terminate the agreement at any time upon 45 days prior written notice.86 It appears

that under that old contract Mediacom did not have to make any cash payments to

Sinclair for carriage of its signals, but that in the negotiations Sinclair was demanding

substantial cash payments for all of its signals.

On October 11, 2006, Mediacom filed an antitrust suit in U.S. District Court in

Des Moines, Iowa, seeking a court injunction against Sinclair’s alleged attempt to tie

retransmission consent agreements for carriage of its popular ABC, NBC, CBS, and

Fox affiliates to the payment of retransmission consent fees for some of its lesswatched CW and MyNetworkTV affiliates.87 Mediacom claimed that it was

interested in entering into retransmission consent agreements for the carriage of

signals of 13 Sinclair “major network stations” (that is, stations that are affiliated

with one of the four major television networks) located in 12 designated market areas

(DMAs) where Mediacom operates cable systems, but not interested in entering into

retransmission consent agreements for the carriage of signals of 9 “other network

stations” owned or operated by Sinclair located in DMAs where Mediacom operated

cable systems, if such agreements required cash payments. Mediacom alleged that

Sinclair maintained a single and non-negotiable demand that Mediacom consent to

a global agreement encompassing all 22 Sinclair stations located in DMAs where

Mediacom provided cable service, that Sinclair required Mediacom to pay the same

carriage rates for the 9 Sinclair stations that Mediacom did not want to carry as for

those it did want to carry, that Sinclair rejected alternative arrangements proposed by

Mediacom, and that Sinclair issued a terminating notice on September 28, 2006,

Sinclair Broadcast Group, Inc. Form 10-K, received by the United States Securities and

Exchange Commission March 9, 2007, at p. 5.

Mediacom Communications Corp. Form 10-K, dated March 8, 2007

In the Matter of: Mediacom Communications Corporation v. Sinclair Broadcast Group,

Inc. Emergency Retransmission Consent Complaint and Complaint for Enforcement for

Failure to Negotiate Retransmission Consent Rights in Good Faith, CSR-7058-C,

Memorandum Opinion and Order by the Chief, Media Bureau, Federal Communications

Commission (hereinafter “FCC Mediacom-Sinclair Order”), adopted and released January

4, 2007, at para. 19.

See Josh Wein, “Stop Sinclair Retransmission Consent Tactics, Mediacom Urges,”

Communications Daily, October 10, 2006, at pp. 5-6.

CRS-42

which ended Mediacom’s right to carry the stations effective December 1, 2006.88

Mediacom also alleged that Sinclair chose to pull the signals during football season,

when Mediacom would be most vulnerable to losing subscribers to competing

satellite providers if it no longer carried the football games aired on Sinclair’s

broadcast signals. In addition, Mediacom alleged that an unnamed satellite operator

agreed to pay Sinclair a “bounty” for any customers it gained if and when Sinclair

pulled its stations’ signals off of Mediacom, which according to Mediacom

represented a conspiracy in restraint of trade.

Sinclair responded that it had negotiated in good faith and was open to

individual carriage arrangements for its stations in Mediacom’s operating area, but

had not negotiated on a station-by-station basis because it did not know that

Mediacom sought an alternative to a group deal.89 Sinclair publicly provided a list

of prices it wanted for each station in Mediacom’s service area — 35-38¢ a month

per subscriber for its CBS, ABC, NBC, and Fox affiliates and 9-11¢ for CW and

MyNetworkTV affiliates this year, as part of a three-year contract with some prices

reaching 42¢ in 2008. Sinclair also filed motions in court to dismiss Mediacom’s

complaint on technical grounds.

The court denied Mediacom’s injunction motion on October 24, 2006.

Mediacom appealed to the U.S. Court of Appeals for the Eighth Circuit, but dropped

the appeal on December 13, 2006.

On October 31, 2006, Mediacom filed at the FCC an Emergency Retransmission

Consent Complaint and Complaint for Enforcement for Failure to Negotiate

Retransmission Consent Rights in Good Faith against Sinclair, requesting that the

Commission find Sinclair in violation of its obligations to negotiate in good faith for

retransmission consent, direct Sinclair to immediately commence negotiations in

good faith for retransmission consent, and impose appropriate relief and sanctions.90

Sinclair filed an Answer and Mediacom filed a Reply and both parties also filed

numerous pleadings, motions, and ex parte presentations. In its complaint,

Mediacom argued that because Mediacom’s systems represented less than 3% of

Sinclair’s aggregate audience, but approximately 50% of Mediacom’s systems were

located in a DMA served by a Sinclair station, Sinclair was in the position to impose

uncompromising and harsh proposals that represented a substantial departure from

the retransmission consent terms and conditions that Sinclair has offered other

similarly-sized cable operators or that Mediacom had been offered by other

Id. Mediacom alleged that Sinclair strategically timed its termination notice to coincide

with a Mediacom effort to sell $300 million in debt, in order to undermine Mediacom’s

access to capital. See Peter Grant and Brooks Barnes, “Channel Change — Television’s

Power Shift: Cable Pays for ‘Free” Shows; Broadcasters Want Cash to Carry Their Signal;

Super Bowl Is Hostage,” Wall Street Journal, February 5, 2007, at p. A1.

Josh Wein, “Sinclair Rebuts Mediacom Antitrust Claim, Discloses Subscriber Fee

Demands,” Communications Daily, October 17, 2006, at p. 6.

FCC Mediacom-Sinclair Order at para. 1.

CRS-43

broadcasters in these same markets.91 This information was intended to demonstrate

that Sinclair enjoyed great leverage in the retransmission consent negotiations

because it would lose very little from an impasse but Mediacom would be very

vulnerable, and thus Sinclair did not have the incentive to negotiate in good faith.

As the December 1, 2006 deadline approached, Sinclair gave Mediacom a shortterm extension to continue carrying its stations, while negotiations continued, after

the CEOs of the two companies met with FCC Commissioner McDowell.92 The

companies agreed to a new January 5, 2007 deadline. At the same time, both

companies attempted to strengthen their negotiating positions — Mediacom by

sending antennas to subscribers who stood to lose Sinclair station signals if the

carriage agreement were terminated, so they could continue to receive the Sinclair

signals over-the-air; Sinclair by offering viewers a $100-$150 rebate to switch to

DirecTV (with which Sinclair had a retransmission consent agreement). One

industry analyst wrote that Mediacom would be vulnerable to subscribers switching

over to satellite service if it lost carriage of the Sinclair stations because it had low

penetration for VoIP and broadband services that might help retain subscribers.93

Mediacom responded to this weakness by introducing a six-month $60 per month

cable, broadband, and VoIP promotion in areas where Sinclair has television stations,

though it did not publicize the promotion but rather offered it to customers who

contacted Mediacom about the potential loss of the Sinclair signals.94

On January 4, 2007 the FCC Media Bureau (acting on delegated authority from

the full Commission) denied the Mediacom complaint, concluding that the dispute

arose from a fundamental disagreement between the parties over the appropriate

valuation of Sinclair’s signals, which is not indicative of a lack of good faith.95 It

strongly encouraged the two parties to engage in hard bargaining to achieve an

agreement. It recognized the cost to consumers if Mediacom and Sinclair failed to

reach an agreement by January 5th, but stated that the Commission does not have the

authority to require the parties to submit to binding arbitration. It could only

“strongly encourage them to submit to binding arbitration,”96 either through the

Media Bureau or through the American Arbitration Association. Although

Mediacom sought such binding arbitration, Sinclair refused to arbitrate.

On January 5, 2007, Sinclair pulled 22 stations’ signals from Mediacom’s cable

systems, affecting 700,000 subscribers. Mediacom continued distributing antennas

FCC Mediacom-Sinclair Order at para. 9.

Josh Wein, “Sinclair May Extend Mediacom Carriage,” Communications Daily,

December 1, 2006, at pp. 3-5.

Id.

Josh Wein, “Mediacom Woos Sinclair-Market Customers with $60 Bundle,”

Communications Daily, December 8, 2006, at p. 5.

FCC Mediacom-Sinclair Order at para. 24.

FCC Order at para. 25.

CRS-44

to its affected customers, who were primarily in Iowa and Florida.97 Media analysts

did not agree about the long-term consequences to Mediacom of the loss of carriage.

One analyst, Jason Bazinet of Citigroup, reportedly did not expect it to have

significant impact, but Rich Greenfield of Pali Research thought Mediacom would

be harmed because it would have to reach agreement with Sinclair to retain

subscribers, but those subscribers had been inconvenienced and that would make it

difficult for Mediacom to recover its higher payments to Sinclair by raising

subscriber rates.98

On January 11, 2007, the Iowa congressional delegation — two senators and

five representatives — asked Mediacom and Sinclair to end the carriage dispute,

supporting the FCC Media Bureau’s recommendation that they submit to binding

arbitration.99 But Sinclair responded by letter that it was not ready to submit to

binding arbitration. Mediacom also took its case to the Iowa General Assembly’s

Joint Government Oversight Committee. Reportedly, some Iowa legislators were

critical of Sinclair, but at least one agreed with Sinclair that the dispute was a private

contractual issue.100 FCC Chairman Martin also stated that he supported binding

arbitration. But when Mediacom filed an emergency petition at the FCC, citing

comments made by Senator Inouye in 1992 (when he was manager of the 1992 Cable

Act that included the retransmission consent provisions in current law) that the FCC

does have the authority to require binding arbitration, the Commission did not modify

the Media Bureau opinion that the FCC does not have such jurisdiction.101 On

January 30, 2007, Senators Inouye and Stevens, chair and co-chair of the Senate

Commerce Committee, urged the FCC to take action to resolve the SinclairMediacom dispute, stating that the FCC had the authority to intervene and arguing

that at a minimum carriage of the signals should be continued while the parties

continued to negotiate.102 They expressed concern that the on-going impasse would

keep some households from viewing the Super Bowl. Sinclair reportedly rejected

their position in a letter in which it stated that “Any suggestion, such as the one

contained in your letter, that government intervention will be forthcoming has had

a chilling effect on the ability of the parties to reach a mutually acceptable agreement

on their own.”103

On February 2, 2007, just before the airing of the Super Bowl, Sinclair and

Mediacom finally reached a retransmission consent agreement, in which Mediacom

Josh Wein, “Comcast Doesn’t Want to Pay to Carry Sinclair Stations,” Communications

Daily, January 9, 2007, at pp. 5-6.

Id.

Untitled article, Communications Daily, January 12, 2007, at p. 12.

100

Linda Moss and Mike Farrell, “Sinclair Settles with TWC,” Multichannel News, January

29, 2007, at p. 3.

101

Although Chairman Martin tried to get the Commission itself to vote in support of the

Media Bureau opinion, no item ever came up for a formal vote.

102

Josh Wein, “Martin Should Facilitate Mediacom Customer Relief, Say Inouye, Stevens,”

Communications Daily, February 1, 2007, at pp. 3-5.

103

Id.

CRS-45

reportedly paid cash fees for carriage of Sinclair’s stations, which were restored to

the cable company’s tiers.104 Mediacom agreed to drop all FCC and legal matters and

to pay for Sinclair’s legal fees from the dispute. Mediacom CEO Rocco Commisso

reportedly admitted that he “caved in”; Mediacom lost 7,000 subscribers in the fourth

quarter of 2006 (before losing carriage of the Sinclair signals) and is expected to

report even greater subscriber losses for the period when it lost the carriage.105

Sinclair-Suddenlink.

Suddenlink Communications is the eighth largest cable television company in

the United States, with 1,377,000 subscribers and operations in more than 20 states,

primarily in suburban, small town, and rural communities. On July 1, 2006,

Suddenlink completed an $800 million purchase from Charter Communications of

cable systems in West Virginia with 240,000 subscribers, 200,000 of whom are

located in the Charleston, WV designated market area of a Sinclair-owned television

station (WCHS, an ABC affiliate) and another television station (WVAH, a Fox

affiliate) for which Sinclair has a local marketing agreement. The remaining 40,000

subscribers are located in the neighboring Bluefield-Beckley-Oak Hill, WV and

Parkersburg, WV designated market areas. The transaction represented a strategic

decision on the part of both cable operators to cluster their systems — it allowed

Suddenlink to expand its presence in the West Virginia-Ohio-Kentucky-Virginia

region and allowed Charter to divest itself of systems that were distant from its larger

holdings in the northeast and west, as well as receive $800 million to buy down its

debt.

The retransmission consent agreement between Charter and Sinclair had expired

prior to the Suddenlink purchase.106 Suddenlink began negotiating a retransmission

consent agreement with Sinclair in May 2006, before its purchase was completed.

On June 30, 2006, Sinclair announced that it had not been able to reach an agreement

with Suddenlink to continue carrying WCHS and WVAH, claiming that

Suddenlink’s retransmission consent offer included no compensation and that there

had been no response to a Sinclair counteroffer.107 Without a retransmission

agreement, WCHS and WVAH would no longer be carried by any Suddenlink cable

system when the transfer was completed. Suddenlink’s subscribers in Charleston

would no longer receive the ABC and Fox programming provided over those

stations. Suddenlink’s subscribers in Beckley would continue to get ABC

104

Linda Moss, “Sinclair’s Retrans Cash Rises 90%,” Multichannel News, February 19,

2007, at p. 40.

105

Linda Moss and Mike Farrell, “Dueling for Dollars,” Multichannel Newswire, March 5,

2007, available at [http://www.multichannel.com/index.asp?layout=articlePrint&articleid=

CA6421302], viewed on June 28, 2007.

106

See Mike Farrell, “Suddenlink, Sinclair in Retrans Clash,” Multichannel News, July 5,

2006, available at [http://www.multichannel.com/index.asp?layout=articlePrint

&articleID=CA6349903], viewed on June 28, 2007.

107

Sarah K. Winn, “Spat imperils city TV viewing,” Charleston Gazette, July 1, 2006,

available at [http://www.tmcnet.com/usubmit/-spat-imperils-city-tv-viewing/2006/07/01/1702516.htm], viewed on June 28, 2007.

CRS-46

programming from the local ABC broadcast affiliate located in Beckley, but would

lose the Fox programming that Charter had been importing from the Sinclair station

in Charleston (in the absence of any local ABC broadcast affiliate in Beckley).

Similarly, Suddenlink’s subscribers in Parkersburg would continue to get Fox

programming from the local Fox broadcast affiliate located in Parkersburg, but would

lose the ABC programming that Charter had been importing from the Sinclair station

in Charleston (in the absence of any local ABC broadcast affiliate in Parkersburg).

A letter was posted on Sinclair’s WCHS and WVAH websites asking viewers to

contact Suddenlink or to switch to a satellite provider, but although the satellite

providers carried Sinclair’s ABC and Fox programming in Charleston (as part of

their local-into-local service), they did not provide those stations’ signals to their

subscribers in Beckley or Parkersburg.108

On July 5, 2006, Suddenlink filed an Emergency Retransmission Consent

Complaint with the FCC, alleging that Sinclair had violated its duty to negotiate

retransmission consent in good faith for the two Charleston stations and that Sinclair

had demanded that Suddenlink terminate retransmission of the stations during the

Nielsen Media Research rating “sweeps” week ending July 26.109 On July 6, 2006,

Sinclair filed an Emergency Petition for Declaratory Ruling and for Immediate

Injunctive Relief with the FCC, arguing that Suddenlink had no authority to carry the

signals of the Charleston stations and requesting that the Commission order

Suddenlink to immediately cease its carriage of those signals. Suddenlink then filed

a supplement to its complaint stating that Sinclair informed it in an e-mail that

continuing to carry the two stations constituted an acceptance by Suddenlink of

Sinclair’s retransmission consent offer.110 Both parties made subsequent filings with

the FCC.

Suddenlink alleged that one week prior to the closing of the Charter purchase,

Sinclair had asked for $4 million in fees over the three-year life of the retransmission

consent agreement, but when Sinclair subsequently learned how much Suddenlink

had paid for the cable systems it instead demanded a one-time up-front fee of $200

per subscriber ($40 million for the 200,000 Suddenlink subscribers in those broadcast

areas) plus a $1 per month subscriber fee ($2.4 million annually) for the right to carry

the stations. Suddenlink alleged that Sinclair threatened to pull the stations from

Suddenlink and notified Suddenlink customers that the stations would not be

available after July 1, 2006. Reportedly, Suddenlink provided the FCC with an email from Sinclair stating, “Without the right to carry these stations, at least 25% of

recently acquired subscribers will discontinue service, resulting in loss of value of

more than $150 million.... Paying $40 million to ... avoid such a loss seems to us a

108

Fred Pace, “No NFL, Simpsons or 24?,” The Register-Herald, July 2, 2006.

109

FCC Public Notice DA 06-1454, released July 20, 2006.

110

Mike Farrell, “Sinclair E-mail Fires up Suddenlink,” Multichannel News, July 6, 2006,

available at [http://www.multichannel.com/index.asp?layout=articlePrint&articleID

=CA6350010], viewed on June 28, 2007.

CRS-47

reasonable price to pay.”111 (The $40 million+ fee would be more than double the

total company retransmission consent revenues Sinclair reported in 2005.)

Suddenlink also claimed that when it informed Sinclair that it was obligated to

carry the stations at least through the Nielsen sweeps (an FCC requirement that

Sinclair disputed was applicable), Sinclair responded that another MVPD had agreed

to pay $200 per defecting Suddenlink subscriber. But Sinclair disputed that

Suddenlink was obligated to maintain its carriage and it may well be that Sinclair’s

reference to another MVPD being willing to pay for defecting Suddenlink subscribers

was intended to support its view that the sweeps requirement was created to protect

broadcasters during sweeps week, not MVPDs, and that such a requirement would

not be binding if the affected broadcaster did not seek such protection.

Sinclair alleged that in the negotiations Suddenlink had proposed payments that

were lower than those Sinclair received from Suddenlink in other markets. Sinclair

also claimed that before the Charter-Suddenlink sale was completed, but while

Suddenlink-Sinclair retransmission consent negotiations were occurring, it had

received a letter from Charter stating that a lack of a retransmission consent

agreement could jeopardize the Suddenlink purchase, indicating the value of the

Sinclair signals; when Sinclair learned how much Suddenlink had paid for the

Charter systems, it reconsidered upward the value of its broadcast signals to

Suddenlink.112 Sinclair vice president and general counsel Barry Faber was quoted

as stating, “If they’re paying $3,200 per sub, why shouldn’t a piece of that be coming

to us?”

Sinclair pulled the WCHS and WVAH signals from Suddenlink’s cable system

in Beckley on July 3, 2006,113 but did not pull the signals from Suddenlink’s

Charleston cable system, presumably in deference to the FCC rule about

discontinuing service during a Nielsen ratings sweep, despite its claim that the rule

did not apply in this situation.

Barry Faber, Sinclair vice president and general counsel, reportedly said that he

was prepared to take the two Charleston stations off Suddenlink’s cable systems

“forever” if his company did not receive adequate compensation.114 He also

reportedly said that Suddenlink made a bad deal with Charter because retransmission

consent for Sinclair’s two stations was not covered in the transfer of assets and

Suddenlink stands to lose more than $125 million of its investment if 20% of its

subscribers defect to DBS providers because Sinclair withholds the signals of its two

major network affiliated stations.

111

Peter Grant and Brooks Barnes, “Channel Change — Television’s Power Shift: Cable

Pays for ‘Free’ Shows; Broadcasters Want Cash to Carry Their Signal; Super Bowl is

Hostage,” Wall Street Journal, Feb. 5, 2007, at p. A1.

112

Id.

113

Joe Morris, “Cable, WCHS at odds: Broadcast dispute might go to court,” Charleston

Gazette, July 7, 2006.

114

Josh Wein, “Suddenlink, Sinclair Prepare for Long Retransmission Consent Fight,”

Communications Daily, July 7, 2006, at pp. 4-5.

CRS-48

Robert Prather, president of Gray Television, the owner of the NBC affiliates

in the Charleston and Parkersburg markets, reportedly stated that if Suddenlink ended

its dispute with Sinclair by paying cash for carriage, Suddenlink would have to give

Gray’s Charleston station the same terms because “We’ve got a most favored nation

clause in our deal. If they pay them, they would have to pay us, too.”115 Nexstar

COO Duane Lammers said that Suddenlink is particularly vulnerable to broadcasters

seeking to extract cash for carriage because it had recently borrowed a lot of money

to acquire rural systems that are “not big enough to be able to sustain a protracted

battle.”116

Suddenlink was especially sensitive to subscriber interest in the upcoming

Major League Baseball All-Star game to be broadcast over the Fox broadcast

network and attempted to make Fox programming available to its subscribers. It did

not have any options in the Charleston market, because the combination of

retransmission consent, network non-duplication, and syndicated exclusivity rules

prohibited it from importing network or syndicated programming without Sinclair’s

permission. But it was able to continue to provide Fox and ABC programming in the

Beckley market. It received permission from the Fox network to retransmit a

national Fox station to replace Sinclair’s Charleston Fox affiliate.117 And Suddenlink

already had a retransmission consent agreement with WOAY, the local ABC affiliate

in Beckley. However, Suddenlink’s subscribers in Beckley no longer had access to

the local news broadcasts on Sinclair’s WVAH and WCHS stations.

In mid-July 2006, Sinclair announced that it made a new negotiation proposal

to Suddenlink — a month to month agreement of 47 cents per station with no upfront

fee or a three-year agreement for $6 million.118 Sinclair claimed that Suddenlink had

not been responsive and that Suddenlink continued to refer publicly only to the

earlier $40 million proposal — which Sinclair said it had made only in response to

Suddenlink’s proposal that there be no charge — as if that was Sinclair’s most recent

offer. Sinclair also ran a crawl message during certain broadcasts informing

customers that its stations might be unavailable soon on their cable system and

providing contact information for DirecTV and DISH Network.

On July 25, 2006, Sinclair and Suddenlink reached an agreement to extend cable

carriage of the Sinclair stations through August 7, 2006, while negotiations

continued.119 In an ex parte filing at the FCC, Suddenlink stated that it had “steadily

increased the overall value of [its] offer.” When the extension was announced,

Charleston, WV, city council member Harry Deitzler voiced concern that the not-yet-

115

Id.

116

Id.

117

Fred Pace, “Still no agreement in cable, TV stations’ brawl,” The Register-Herald, July

13, 2006.

118

Fred Pace, “Sinclair makes offer to settle dispute with Suddenlink cable,” The RegisterHerald,

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