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The Television Giants Are Rumbling

By David Smith – Updated Nov 14, 2016 at 8:10PM

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A look at the conflict between broadcast companies and cable operators

Turn on your television tonight and, in addition to news of the war you know is being waged halfway around the world, you might unknowingly be watching a battle you weren't aware of. In some respects, this battle harks back to the early days of television, when programming included such bygone gems as The Texaco Star Theater.

This generally unknown conflict involves the cable operators and the broadcast companies in a sort of festering Hatfield-and-McCoy-style staredown. It also comes at a time when the world couldn't have appeared brighter for the cable operators. Just last year, Comcast (NASDAQ:CMCSA), the acknowledged industry leader, leveraged its new triple play offering of digital video, high-speed data, and Internet telephony to sign up new subscribers at a breakneck clip. And up the road at Cablevision (NYSE:CVC), that company's own successes and apparently rosy future prevented its controlling Dolan family members from pulling off a planned privatization of the company, through the purchase of the Cablevision shares they didn't already own, or at least at a price they were willing to pay.

But now, the cable operators are being challenged by the broadcast companies, a group with whom they've coexisted in evident harmony for more than half a century. Ever since cable and broadcasting were in their infancy together in the late 1940s, the broadcast companies have suffered in relative silence as their signals were picked up and retransmitted by cable companies without meaningful compensation for that reuse. In fact, the first cable companies generally were founded in the mountains of Pennsylvania simply because the area's terrain hindered reception of broadcast's early signals.

The broadcasters' quick change
Now the broadcasters finally are flexing muscles they actually have possessed since Howdy Doody entertained the nation's children. In the process, and under the threat of their signals being blacked out for cable subscribers, the broadcast companies are demanding payment for the programming that the cable multisystems operators (MSOs) long have picked up gratis.

It seems to me that this quarrel, which received lengthy attention in a Wall Street Journal article last week, could have a significant effect on cable bills across the nation; on the profitability of the broadcasters'; on the ability of the MSOs to fend off incursions from satellite television providers and phone companies; and -- last but clearly not least -- on the share prices of all of the companies involved.

One of the key vignettes from the Journal's article involved a fray between medium-sized cable operator Mediacom (NASDAQ:MCCC) and one of the larger broadcasters, Sinclair Broadcast Group (NASDAQ:SBGI), with its 57 television stations. According to the paper's account, Sinclair had threatened to block the network shows being provided by its stations to Mediacom subscribers, unless the MSO agreed to compensate Sinclair for its programming.

Hardball leadership
The negotiations between the companies evidently included a three-hour "CEO to CEO" session in July, between Mediacom's tough and capable CEO Rocco Commisso and his equally tough and capable Sinclair counterpart, David Smith (whos is also the son of the company's founder). The session apparently had little impact in resolving hostilities, and jockeying between the companies continued into September, when Mediacom was attempting to sell $300 million in debt. That effort was threatened by a notification from Sinclair that the cable operator's right to carry the Sinclair programming would end on Nov. 30.

On Jan. 6, switches were thrown in a dozen Midwestern states, blacking out Sinclair channels for half a million Mediacom subscribers. On a Friday a couple of weeks ago, with the specter of the Super Bowl being unavailable to its subscribers, Mediacom capitulated. Commisso reportedly was influenced by, among other things, his assessment that the Federal Communications Commission -- under its current chairman, Kevin Martin -- has sided disproportionately with the broadcasters in their squabbles with cable.

But the Sinclair-Mediacom dustup was hardly a localized event limited to these companie. In fact, it evidently followed a settlement between Sinclair and Time Warner (NYSE:TWX), the nation's second-largest cable operator, regarding the carriage of signals from 35 Sinclair stations. That settlement likely involved payment by Time Warner to Sinclair, although neither company is disclosing the terms, as is the case with Sinclair's settlement with Mediacom.

And Comcast and Sinclair may be heading for a confrontation, despite an avowal by a Comcast executive that the company will not "pay for free TV." Nevertheless, the respected media research firm Kagan Research recently predicted that the MSOs alone could be subject to as much as $400 million in annual retransmission fees by 2010.

The potential consequences
From my perspective, there are several key facts and considerations that Fools should be aware of as they watch this interesting and important situation unfold:

  • At this juncture, and unless the situation's dynamics change appreciably, the broadcasters probably have the upper hand in their squabbles with the MSOs.
  • In addition to Sinclair, those broadcasters that are unencumbered by newspaper ownership and thereby stand to benefit most directly from content payments include CBS (NYSE:CBS), LIN, and Hearst Argyle.
  • Right now, it is impossible to accurately forecast the potential boost to broadcasters' earnings from widespread compensation from the MSOs. However, my admittedly quick analysis indicates that a 10% to 20% increment is not out of the question.
  • The role of both the FCC and Congress could become significant if the struggle widens. But because the broadcasters do appear to enjoy leverage (from their ability to pull signals) at present, it's probably in their best interest to keep Congress from becoming too interested in the unfolding events. Without mentioning names, however, the Journal indicates that two senators are monitoring the intensifying cable-broadcasting confrontation.
  • The MSOs' primary competitors, the satellite television providers and the phone companies, already compensate the broadcasters for signal transmission. In fact, according to the Journal, satellite provider DirecTV (NYSE:DTV) and Sinclair carried on a combined marketing effort to lure Mediacom subscribers to the satellite company during the latter part of last summer.
  • Those most likely to be negatively affected by MSO payments to broadcasters are current cable subscribers. And since the cable operators long have been subject to criticism for their progressively higher billing rates -- and despite their likely ability to pass fees to the broadcasters on to their subscribers -- it's difficult to imagine how the cable operators cannot be damaged by these changing affairs, especially as they attempt to contest the telephone companies' own triple play offerings.

Many Fools realize that I consider Comcast to be an unusually solid company and a particularly sound investment. Nevertheless, I urge that you carefully watch the unfolding dispute for its potential effects on the broadcast and cable companies -- and on thelatter's competitors.

For related Foolishness:

Time Warner is a Stock Advisor recommendation. For more picks from Tom and David Gardner, try a subscription on for size, free for 30 days.

Fool contributor David Lee Smith does not own shares in any of the companies mentioned. He welcomes your comments or questions. The Fool has a disclosure policy.


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