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Time Warner, CBS reach deal to end blackout

Time Warner, CBS reach deal to end blackout

This undated publicity image released by Showtime shows Michael C. Hall as Dexter Morgan in a scene from the final season of "Dexter." Photo: Associated Press/Showtime/Randy Tepper

By Ronald Grover and Liana B. Baker

(Reuters) – CBS Corp won large increases in the fees it will receive from Time Warner Cable Inc in its agreement with the cable operator that ended a month-long blackout of CBS, Showtime and other channels in key cities, analysts said.

CBS was asking for as much as $2 a month in “retransmission fees” to allow Time Warner to carry the CBS network and other channels for each of its 3.2 million cable subscribers in the affected areas. That would be a large hike from the current CBS monthly fee of around 56 cents a subscriber, although any increase would be phased in over the life of the contract.

The standoff between CBS, the top-rated U.S. broadcaster and Time Warner Cable, the country’s second-largest cable operator, was seen as a major test of whether Time Warner Cable could withstand price increases for programming that threatens to reduce earnings for U.S. TV distribution companies and raise consumer prices.

“CBS is the winner. Content owners always win these negotiations, it’s just a matter of how much they won,” said cable and telecommunications analyst Craig Moffett of Moffett Research.

“They have all the leverage. Consumers don’t get mad and trade in their channel when these fights drag on. They go looking for a different satellite or telephone company.”

The companies did not disclose terms of the contract, and spokespeople would not comment.

The two sides had been at odds since August 2, when talks broke down and CBS, Showtime and other CBS-owned channels were blacked out in New York, Los Angeles, Dallas and other smaller markets.

In addition to higher retransmission fees, CBS also had demanded to be paid for the digital rights to its TV shows. Time Warner wanted to receive CBS programming for its digital outlets without paying additional costs, which would extend a provision of their 2008 agreement.

CBS has since received payment from Comcast and other cable operators for the digital use of their programs.

“We are receiving fair compensation for CBS content,” CBS chief executive Leslie Moonves said in a statement. “And we also have the ability to monetize our content going forward on all the new, developing platforms that are right now transforming the way people watch television.”

The agreement will almost certainly continue to reduce Time Warner Cable’s margins, which have narrowed for the past decade as program costs have increased faster than operator’s ability to raise rates, said Michael Corty, an analyst with Morningstar who follows Time Warner Cable.

“The video margins are still substantial, but cable operators are having to make it up more and more from broadband sales,” he said.

Other cable operators such as DirecTV which had backed Time Warner Cable in its standoff with CBS will be looking closely at the deal as they struggle against rising program costs.

Later this year, satellite operator Dish Network Corp’s contract with Walt Disney Co expires, which will require negotiations over increases for channels including sports channel ESPN, the most expensive channel on the dial.

Under the agreement announced over the weekend, Time Warner Cable will be able to offer an app for CBS’s Showtime premium channel on its digital services, the two sides said in a statement. But analysts believe that the cable operator will be paying for the rights to any digital content.

CBS frequently mentions digital licensing of its content as one of the major drivers of earnings growth for its TV properties in earnings reports and conference calls.

“We wanted to hold down costs and retain our ability to deliver a great video experience to our customers,” Time Warner Cable Chairman and Chief Executive Glenn Britt said in a separate statement. “While we certainly didn’t get everything we wanted, ultimately we ended up in a much better place than when we started.”

Programming on all networks resumed at 6 p.m. EDT on Monday, the two sides said in a statement.

Talks intensified in late August, according to a person with knowledge of the negotiations, after CBS began airing ads in the three main markets that urged fans to switch television providers before the start of the football season.

The ads, which feature a much-anticipated match-up between star sibling NFL quarterbacks Peyton and Eli Manning, were designed to highlight what Time Warner subscribers would miss should the blackout interrupt viewing of the football.

Eventually, fights that lead to rising program costs could bring in federal oversight from consumer-minded politicians and regulators, said Richard Greenfield, an analyst with the firm BTIG.

“Change is coming,” Greenfield said in an email. “2014 will not be like 2013. Broadcasters shouldn’t get too smug with this victory.”

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