Today (Monday) marks the 11th day of hostile retransmission negotiations between cable network operator CBS (NYSE: CBS) and Time Warner Cable (NYSE: TWC). Because the two sides could not reach an agreement on how much TWC will pay CBS (per subscriber per month) for access to CBS programming, today also marks the 11th day that TWC subscribers have been without all CBS programming (which also includes Showtime).
Naturally, cable subscribers tend to blame their cable providers when they lose access to programming over retransmission agreements. Subscribers pay somewhere in the range of $60-$100/month to Time Warner Cable, not to CBS, so naturally consumers blame the party who takes their money every month. This puts more pressure on the providers than the networks, because TWC subscribers can (hypothetically) always switch to another cable provider in their area.
The Cable TV Model
The model is simple—carriers like Time Warner Cable, DirecTV (NASDAQ: DTV), Verizon (NYSE: VZ) Fios, etc. come to agreements with each network on how much their subscribers will pay (per month) for each of that network’s individual channels based on how popular the channels are. So your monthly cable bill is basically the sum of all of these charges (that your cable provider passes along to you), plus however much markup (and miscellaneous fees/charges) it takes to allow the carriers to turn a profit while still remaining competitive in the cable space.
Each channel’s price should be based solely on objective merits like its popularity, the advertisability of its audience, etc. In reality, companies like Disney (NYSE: DIS), whose media networks include ESPN, A&E and others, force cable providers to buy all their channels (even the unpopular ones) as a package. Providers may have no interest in paying 30 cents (fictitious number) for ESPN Deportes, for example, but if they want ESPN they need to play ball and negotiate with Disney for all of its channels. (Side note: ESPN costs a whopping $5.06 per subscriber per month. The next-highest non-sports channel is 3net at $1.29 per month.)
As with any negotiation, the key determinant of its outcome is leverage. Keep in mind that these negotiations aren’t typically contentious (at least not in public)—think of how many agreements are constantly renewed that you never hear a word about—but they are never easy and both sides need to be fairly compensated for their contribution to the other. When things get contentious, leverage is key.
When Disney conducts retransmission negotiations with a cable provider like DirecTV, both sides have a certain degree of leverage. Disney knows that if DirecTV doesn’t offer its channels, DirecTV customers will certainly be angry and may even switch cable providers. By the same token, if Disney’s audience does not include DirecTV customers, their advertising revenues will suffer because advertisers know they are reaching fewer eyeballs. But again, because consumers pay cable providers and not networks (and can find a new provider), the networks have considerably more leverage than the providers.
Analysts are convinced that Time Warner Cable is under more pressure than CBS to get an agreement in place. CBS’ regional networks carry NFL games—a sport with a rabid fan base, a fan base that will change cable providers (or do whatever it takes) if that means they will get their local football games every Sunday.