The cable provider’s gripe with Viacom is that it’s being forced to eat the costs of less popular networks for the privilege of carrying more popular content. Cablevision called Viacom’s channel-bundling packages “anti-consumer and wrong,” and it seeks a void to the two-month-old carriage agreement.
Content providers charge cable and satellite providers steep fees to broadcast their programming and make them carry lesser-viewed channels alongside preferred ones. The cable industry has argued for years that bundling channels is a necessary evil and that a la carte pricing would hurt consumers by raising costs. But their justification for forcing consumers to buy unwatched channels is rapidly losing ground.
Look at it this way: Would an ice cream company try to force a supermarket to carry an unpopular flavor — say, anchovy — for the right to carry popular flavors like chocolate or vanilla? Of course not. But this is essentially what content providers are doing.
“It’s a problem not just for Cablevision but also for hundreds of small and medium-sized cable operators,” says the American Cable Association, which represents small- and mid-size cable systems. “If the courts can address this problem, then we believe this would be a good outcome for consumers.”
Media companies have a lot at stake in this lawsuit. As Bloomberg News notes, if consumers cut the cord on their pay-television service, Cablevision would be forced to rely on raised Internet service rates to make up the difference. But raised rates are only a partial solution, and they’re likely to irritate customers.
Comcast (NASDAQ:CMCSA), the largest U.S. cable operator, also has plenty at stake. The Philadelphia-based company earned $15.9 billion in fourth quarter revenue, $10 billion of which came from its core cable, phone and Internet business.
Meanwhile, New York-based Viacom, parent of MTV and Comedy Central, has better options for recovery from dropped subscriptions. Providing content to new entrants such as Netflix (NASDAQ:NFLX) and Amazon.com (NASDAQ:AMZN), could make up the difference from cord cutters without relying on price hikes.
Viacom’s fees are particularly hard for TV providers to stomach because ratings on some of its big channels have plummeted. Bloomberg estimates that the broadcasters charged TV providers more than $2 billion to carry their signals. Pretty hefty, considering the service was formerly free.
The price seems especially steep on top of the skyrocketing costs for sports programming, which put a huge dent in the profits of cable and satellite TV providers.
News Corp’s (NASDAQ:NWSA) Fox, Disney’s (NYSE:DIS) ESPN and Time Warner’s (NYSE:TWX) Turner spent a collective $12.4 billion for the broadcast rights for Major League Baseball from 2014 to 2021. Football, which is by far the most watched of the pro sports, was even pricier. In 2011, Fox, CBS (NYSE:CBS) and NBC agreed to pay $28 billion in fees for the rights to NFL games from 2013 to 2022.
Less popular sports such as USA Swimming and IndyCar have recently signed new broadcast deals and some teams in major media markets are cashing in as well. For instance, The Los Angeles Dodgers reportedly signed a 25-year, $7 billion agreement with Time Warner Cable.
Sports TV costs are spiking for consumers in turn. According to Bernstein Research, costs for ESPN and regional sports networks account for about 50% the average TV service bill. That figure will only escalate in the coming years as new sports networks come on line, like the one being developed by News Corp.
The Cablevision suit threatens to turn the business model that has served the television industry for decades on its head. It will cast a cloud over media stocks and depress their values.
Investors who aren’t already in the sector are advised to steer clear for now.
As of this writing, Jonathan Berr was long CBS. Follow him on Twitter@jdberr.