Cablevision Systems (NYSE:CVC) can move forward in its lawsuit against Viacom (NASDAQ:VIA), according to a judge's ruling. Cablevision wants to avoid being forced to buy the channels it doesn't want in order to get the channels it needs. Much like the rest of us.
It's amusing to see a cable company arguing against channel bundling, given how the industry has always used that practice to inflate customer bills. In general, this is done through tiered systems.
The very basic tier will offer a very limited channel selection consisting mostly of local channels with a few select others. The next tier up -- the one most people buy -- will offer popular networks like MTV and ESPN while giving you an array of others you may not want.
Higher tiers will feature even more specialized offerings, where a customer who wants something specific, such as a regional sports network, can only get it by paying for whatever tier it gets placed in. Every higher tier offers more channels for more money, with no options to create a package of only the ones you want.
In its lawsuit, Cablevision -- which does not offer customers a la carte pricing -- is asking a judge to force Viacom to do exactly that for them. Under the current arrangement, Viacom is able to leverage its ownership of four popular channels -- BET, Comedy Central, MTV, and Nickelodeon -- to force Cablevision to also pay for Centric, CMT, CMT Pure Country, Logo, MTV Hits, MTV Jams, Nick Jr., Nick 2, Nicktoons, Palladia, Teen Nick, Tr3s, VH1 Classic, and VH1 Soul.
Viacom will allow Cablevision to buy the big four, but it would exact a penalty around $1 billion, according to the complaint. The exact amount has been redacted from the released version of the lawsuit but the word "billion" was left in.
Why does Viacom do this?
This is not merely a Viacom issue -- the practice of bundling channels is common. The company just seems to be the most egregious offender.
ESPN, for example, is the most expensive channel for a cable company to licence. The channel's $5.54 average monthly price is more than four times the fee for the next most expensive national network, The New York Times reported in August 2013. In making its deals with cable companies, ESPN has pricing flexibility if the cable provider also takes ESPN 2, ESPN Deportes, and the company's other channel offerings.
Some subscribers will want those channels and if the total package price is not that much more than just buying the main channel alone, the deal makes sense. Once ESPN has its channels on a system, its hope is that the secondary offerings become more popular, making it possible to seek a higher price in the next deal.
It's all about forcing a cable company to take a channel that may have limited appeal. Once that network is offered customers -- even if they are a tiny minority -- they can become very vocal if it gets taken away.
CMT, for example, is aimed at country music fans -- a pretty small audience in Cablevision's largely Northeast subscriber base. But if you give that small number of fans a dedicated country music channel they are likely going to be upset if it gets taken away. They may even get upset enough to look for alternatives including satellite providers DirecTV (NASDAQ:DTV) or Dish (NASDAQ:DISH).
What did the judge rule?
The case has not been heard yet, but a federal judge rejected Viacom's motion to dismiss it before it gets that far. Cablevision has "pleaded facts sufficient to support plausibly an inference of anticompetitive effects," U.S. District Judge Laura Taylor Swain wrote Friday. Viacom argued in its motion for dismissal that Cablevision failed to allege anti-competitive effects, but was unable to convince the judge. The judge laid it out as follows in her ruling:
Cablevision entered into a licensing agreement with Viacom in 2012. In the negotiations, Viacom required Cablevision to license a dozen less popular programing networks (termed "Suite Networks" in the Complaint) in order to gain license rights to what Cablevision alleges are "four commercially critical" programming networks, which Cablevision terms "Core Networks." Cablevision alleges that Viacom threatened it with a substantial financial "penalty" for declining to purchase the licenses for, and distribute, the Suite Networks along with the Core Networks. Cablevision further alleges that the channels on which it is able to offer programming are limited and that, were it to be able to forego the Suite Networks, it would seek out programming from other suppliers.
The ruling makes it likely that the case will proceed to trial unless Viacom alters its practices and attempts to settle.
How will this impact consumers?
If it's illegal for content companies to force cable providers to buy channels, it seems likely that the same could be said for cable companies forcing customers into paying for unwanted stations. If Cablevision succeeds it may undermine its own business model and force a la carte pricing. In some ways that would be good for consumers, but it would likely mean the end of a number of niche channels.
The rise of digital streaming services and people cutting the cord has generally pushed the industry toward an a la carte model -- better to sell customers a few things they really want than nothing at all. If the ruling ultimately goes against Viacom, expect a suit to be filed to make the cable companies put an end to tiered channel packages. That may lead to lower cable bills and a much smaller cable universe, where smaller stations must survive on their own merits, rather than being pulled along by a more successful sister channel.
Daniel Kline has no position in any stocks mentioned. He prefers the Cooking Channel. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.