Negotiating Carriage Fees: Who Holds the Leverage?

The negotiation of carriage fees between cable operators and content networks is a complex and often contentious process. The leverage held by each party depends significantly on the unique characteristics of the channel or network in question. This article delves into the factors influencing these negotiations and the typical power dynamics at play.

Initial Channel Creation

The process of negotiating carriage fees can vary widely depending on whether the channel or network is new or established, and whether it offers exclusive content. For brand new channels without exclusive deals, such as those for specific content or sports leagues, the power lies primarily with the cable operator. These new channels often have to pay cable providers to be included in the initial lineup, which is typically the most-watched tier. A good example of this is Fox News, which had to pay cable companies to be included in the under 100-channel lineup during its early days.

Conversely, brand new channels that secure exclusive content deals, such as NFL Network or Big Ten Network, can name their price and conditions. In such cases, cable providers may be more willing to pay significant amounts if the content is in high demand. However, this approach comes with risks; as exemplified by Time Warner Cable (TWC), which found itself in a challenging situation when it did not wish to pay millions for a handful of football games, leading it to almost fold after a year.

Established Channels

For more established networks, the negotiation dynamics shift significantly. Channels such as CBS, ESPN, and Viacom often hold a considerable advantage in negotiations, especially before a blackout occurs. A blackout, in this context, refers to the network's ability to remove their content from cable providers if an agreement is not reached. This unilateral power often means that cable operators are more likely to bend to the content network's conditions to avoid a blackout and the resulting loss of subscribers.

During a blackout, the advantage is even more pronounced, as cable operators would be forced to pay whatever price is demanded by the content network to avoid losing access to the content. This has historically led to cable operators capitulating in such situations.

Leverage for Low-Viewership Channels

For cable networks with lower viewership, such as Discovery and PBS, the situation is somewhat more balanced. These networks still want to be included in the lineup but are more flexible regarding their placement in the viewing tiers. Cable providers, on the other hand, are still interested in keeping them in a tier that doesn't significantly impact subscriber numbers. This dynamic allows both parties to find a mutually beneficial solution.

Premium Channels

Premium channels like HBO often find themselves in a more balanced negotiation because they offer exclusive content that is highly valued by subscribers. However, the use of these channels as a bargaining chip by their owning networks can sometimes shift the leverage back in favor of the content networks. The current trend in carriage fee negotiations includes a simulation of the a la carte model, which cable providers find advantageous. This model allows subscribers to choose individual channels rather than bundling all channels together, theoretically making the cable operator more profitable.

Additional Factors

There are two additional factors to consider in these negotiations. First, networks are typically interested in two things: per subscription (per sub) fees and being included on the lowest tier possible. Higher tier sub numbers often result in significantly lower per sub fees, which is why networks aim to be on the lowest tier possible to collect more money. Being on a lower tier also improves their viewership because it is more likely to be marketed and accessed by subscribers.

Second, cable operators are generally not against the a la carte model. However, content networks are extremely resistant to it, as it could significantly reduce their revenue. Most retransmission contracts are written to protect the current tier system, which is beneficial for content networks.

Conclusion

The negotiation of carriage fees between cable operators and content networks involves a complex interplay of various factors, including the channel's viewership, exclusive content deals, and the power to cause a blackout. While cable operators have significant leverage for new channels and those without exclusive deals, established channels and premium networks often hold the upper hand due to their exclusive content and the potential for blackouts.

Understanding the power dynamics and the factors at play is crucial for both cable operators and content networks as they negotiate these complex and often lucrative deals. As the industry continues to evolve, these negotiations will likely become even more critical and complex.