DEALTALK-Small cable networks could get pushed into deals

* Independents getting squeezed in programming talks

* Small cable networks ask gov’t for help in negotiations

* Retransmission fees wreaking havoc on cable, say execs

* Consolidation could help cable networks cope

By Yinka Adegoke

NEW YORK, Sept 28 (BestGrowthStock) – Small independent cable
networks could be forced to sell themselves to larger media
conglomerates in the next 12 months as their profits are squeezed
by pay TV operators looking to cut programming costs.

The lifeblood of networks are the fees that cable, phone and
satellite operators pay for the right to televise their
programs. Such programming fees are often the largest costs to
the operators.

Programming costs are expected to rise 7 percent this year
due to pressure from large media groups that own broadcast
networks. These media titans – Walt Disney Co (DIS.N: ), News Corp
(NWSA.O: ) NBC Universal – are demanding cash for the right to
carry the big broadcast networks, ABC, CBS, Fox and NBC.

Standalone cable networks, such as Outdoor Channel, Hallmark
Channel or even a mid-sized group like Scripps Networks, are
likely to suffer because they lack the leverage of Walt Disney,
which can negotiate higher fees for its cable networks in tandem
with the threat that it will withhold its ABC network from an
operator’s subscribers.

Disney did exactly that when it threatened to pull ABC from
Cablevision Systems Corp (CVC.N: ) just before the Oscars
broadcast began.

Scripps Networks Interactive Inc (SNI.N: ) saw the writing on
the wall last year when it took over Travel Channel in a deal
that valued the network at nearly $1 billion, nearly 40 percent
higher than the most optimistic estimate.

The deal allowed Scripps to bulk up in the face of tougher
negotiations with operators.

Scripps CEO Ken Lowe told Reuters there is a possibility of
consolidation due to the more difficult negotiating environment.
“If you look at the Comcast/NBC deal you realize there is going
to be safety in numbers. It’s going to be very difficult to be a
standalone network,” he said.

Scripps has been seen by Wall Street as a potential target
for companies like Time Warner Inc (TWX.N: ) and Viacom Inc
(VIAb.N: ) but Lowe would only acknowledge that his company is
just as likely to be a buyer of smaller networks.

Smaller networks have even less leverage. “We have no
negotiating hand. It means independent programmers are barely a
step ahead of what I would call polite begging,” said Michael
Schwimmer, chief executive of Si TV, an independent network which
targets U.S. Hispanics and reaches 30 million U.S. households.

“The cable operator will say ‘Gee, I’d love to carry your
programming but I’ve given all my money to the broadcasters,'” he
added.

Schwimmer led a group of small networks on Capitol Hill
earlier this month to urge regulators and Congress to fix what
they said are out-dated programming rules that give broadcasters
an unfair negotiating advantage as owners of essential
programming such as the Super Bowl or the Olympics.

These tensions come as the top U.S. cable operator Comcast
Corp (CMCSA.O: ) seeks regulatory approval to buy a controlling
stake in NBC Universal.

The small networks point to comments by CBS Corp (CBS.N: )
Chief Executive Les Moonves who said in June he expects cable
operators to reduce payments to smaller networks in order to pay
for the right to carry broadcast networks. By squeezing smaller
networks, operators want to avoid raising prices for their
subscribers.

PAY UP OR GO DARK

If the networks don’t agree to lower fees, operators could
just drop them from their services. Crown Media’s (CRWN.O: )
Hallmark Channel went dark on AT&T Inc’s (T.N: ) U-verse TV on
Sept. 1 when the two sides failed to reach a deal.

Smaller networks that lack negotiating leverage are
frequently underpaid, said Hallmark Channel Chief Executive
Bill Abbott.

“We don’t get to benefit from our value like many of our
market competitors and that’s primarily due to the fact we
don’t get to play the retransmission card,” said Abbott,
referring to retransmission consent, which allows broadcast
networks to charge operators for the right to carry those
networks.

“We are susceptible to being dropped or not being paid as
high a market rate as our competitors,” he added.

In 2005, Hallmark explored the possibility of a sale but
didn’t get a price it liked. The pressures are much sharper
now.

“Cash for retransmission consent does add to the burden,
and the independent networks just don’t have the leverage,”
said Collins Stewart analyst Thomas Eagan.

Scripps’ Lowe said programming negotiations had become
“harder and harder” in part due to the addition of
retransmission fees.

The difficulties of small networks plays into the hands of
media bankers, who since the downturn in advertising have placed
a premium on the dual revenue streams of affiliate fees and
advertising that cable networks traditionally offer.

“The dual revenue stream will be a big driver in
consolidation,” said Scott Singer, an investment banker at
boutique outfit Bank Street. “Those large media companies that
are too advertising-dependent will want more programming fee
revenue.
(Reporting by Yinka Adegoke; Editing by Derek Caney)

DEALTALK-Small cable networks could get pushed into deals