COUNTDOWN TO A BLACKOUT

Why is Dora crying? That was the question readers were faced with when they opened the New York Times and LA Times on December 31, 2008. Viacom, owner of the Nickelodeon television channel where Dora the Explorer shares the stage with SpongeBob SquarePants and many other favorite children's television stars, purchased full-page advertisements of the cartoon adventurer with a tear streaming down her cheek clutching her frightened looking sidekick, Boots the Monkey. The image was accompanied by this alarming message: Time Warner Cable is taking Dora off the air tonight along with 19 of your favorite channels. Throughout the day, viewers of Viacom channels saw a ticker running across the bottom of their television screens alerting them to the impending blackout, and in the face of Viacom's aggressive media campaign, Time Warner found its call centers swamped by angry customers, many the parents of distraught children, demanding that Time Warner keep the Viacom channels on the air, or else they might look for another cable provider. Time Warner is the second largest cable provider in the United States with approximately 13.3 million subscribers. Viacom is one of the largest providers of cable TV channel programming, including MTV, VH-1, BET, Spike TV, Nickelodeon, and Comedy Central. Viacom's media campaign came at the climax of a growing dispute between the two companies as the agreement under which Viacom granted Time Warner the rights to broadcast its channels would come to an end at 12:01 on January 1st. If Time Warner did not come to terms with the programmer, Viacom threatened to pull its channels. To renew the contract, Viacom asked Time Warner to pay an additional $37 million per year for its programming on top of the $300 million it was already paying-roughly a 12 percent rate increase. At the time, Viacom's programming constituted about 7.9 percent of Time Warner's programming costs. Viacom argued that given the estimated 25 percent of cable viewers who tuned in to Viacom channels over the course of a given day, the amount that Time Warner was paying left Viacom's programming well underpriced in comparison to other channels. Costs for the Disney Channel amount to about 85 cents per subscriber per month, and ESPN costs about $4. In contrast, Viacom's MTV would cost 32 cents and Nickelodeon would cost 45 cents per month. Viacom's rate increase would amount to a monthly cost of about 23 cents per subscriber, a sum they claim is modest in comparison to the likes of ESPN's subscriber costs, especially considering it would cover Viacom's entire package. Time Warner responded that in the current economic environment, such a rate increase could not be justified. As the company said in response to Viacom's media campaign, the majority of any rate increase would likely have to be absorbed by customers. Furthermore, Time Warner pointed out that in many cases, Viacom was offering the same programming that it was threatening to pull from Time Warner on the Internet for free. Time Warner argued that a rate increase would have Time Warner customers subsidizing Viacom's Internet programming, even going so far during negotiations as to threaten to provide customers a way to connect their laptops to their cable boxes and to stream programs from the Internet onto their TVs. Fortunately for customers (or perhaps unfortunately, depending on how much of the cost they end up having to shoulder), in the midst of negotiations, Viacom agreed to suspend its decision to pull its programming, and the two companies were able to come to terms shortly after midnight when their previous contract expired. Traditionally, network programmers hold the upper hand in disputes over programming costs, but in this instance neither Viacom nor Time Warner could afford the fallout of a protracted channel blackout. Viacom's bid for increased subscription fees is not unique; as advertising revenues decreased over the course of the year, many network programmers looked to cable providers for higher fees to fund increasing programming costs. Any sort of blackout, however, would have greatly hurt whatever ad revenue Viacom was already generating. For Time Warner, while increased fees would be unpleasant, a blackout could send increasingly wary cable customers to competitors. In the end, no blackout occurred, and Dora was able to stay on the air.20

Questions

1. What is the channel arrangement described between Viacom, Time Warner, and consumers? Who are the intermediaries?

2. What is the channel conflict between Viacom and Time Warner?

3. Obviously the conflict between Viacom and Time Warner has strained their relationship. If you were in charge of one of these companies, what steps would you take to improve their channel relationships?