Cablevision: Viacom threatened $1BN penalty for not taking low-rated networks

Michelle Clancy | 10-03-2013

Cablevision, which is suing Viacom for what it alleges is illegal bundling of its networks, has issued a redacted version of its complaint that accuses Viacom of threatening to impose a fine of at least $1 billion (and possibly as much as $9 billion) if Cablevision didn't carry its entire swathe of networks.
"The complaint clearly demonstrates that in order to carry Viacom channels like MTV, Comedy Central and Nickelodeon, Cablevision also had to agree to carry more than a dozen lesser-watched Viacom channels - or pay Viacom a penalty of more than $1 billion,” Cablevision said in a statement. “This anti-consumer abuse of market power is a key reason cable bills continue to rise and programming choice remains limited. Cablevision is taking legal steps on behalf of our customers to end this clear violation of federal antitrust laws."
SNL Kagan estimated that Cablevision pays around $76.8 million per year for the eight must-have Viacom channels (including MTV, Nickelodeon and Comedy Central), and about $38.8 million for the other 14 — bringing the grand total to $115.5 million yearly for the bundle.
"The manner in which Viacom sells its programming is illegal, anti-consumer and wrong," Cablevision said in a statement. "Viacom effectively forces Cablevision's customers to pay for and receive little-watched channels in order to get the channels they actually want. Viacom's abuse of its market power is not only illegal, but also prevents Cablevision from delivering the programming that its customers want and that competes with Viacom's less popular channels."
The suit comes just two months after the two companies reached a fresh carriage deal. "Many distributors take advantage of these win-win and pro-consumer arrangements," Viacom fired back in the company blog. "Reflecting the highly competitive cable programming business, these arrangements have been upheld by a number of federal courts and on appeal."
Viacom added that it will vigorously defend against what it called a "transparent attempt by Cablevision to use the courts to renegotiate our existing two-month-old agreement.”
Cablevision wants triple damages and legal fees, and wants its December 2012 carriage agreement with Viacom voided. It is also seeking a permanent injunction barring Viacom from conditioning carriage of any or all of its core networks, which include MTV, Nickelodeon, VH1, Spike, TV Land, Comedy Central and BET.
"Viacom's conduct harms Cablevision and its customers, and impairs competition by making Cablevision pay for and carry networks that many subscribers do not want to watch, while other networks are excluded from distribution, preventing Cablevision from being able to differentiate its services and harming subscribers," the suit said.
When it comes to the legal nitty-gritty, Cablevision's complaint also asserts that Viacom engaged in a "per se" illegal tying arrangement in violation of the federal antitrust laws, as well as unlawful "block booking," which is a form of tying that conditions the sale of a package of rights on the purchaser's taking of other rights. The cableco also said that Viacom's conduct also violates the Donnelly Act in New York State Law, which parallels federal antitrust laws.
But some aren't so sure that Cablevision has a case. "The truth is they do not typically force multichannel operators to take the whole bundle, they just give them discounts when they take multiple networks and more discounts when they hit certain penetration hurdles," SNL Kagan analyst Derek Baine said. "That's how they have always gotten around this argument in the past."
SNL Financial analyst Sarah Barry pointed out in a report that the last lawsuit to cover this territory was Brantley vs. NBC Universal, where cable and satellite subscribers filed a class-action suit against NBCUniversal, Viacom, Disney, FOX, Time Warner, Time Warner Cable, Comcast, Cox Communications, DIRECTV and Cablevision, arguing that the programmers' practice of selling multichannel cable packages to distributors violated antitrust law. The subscribers said there were two classes of channels: "must-have" networks and less desirable, low-demand channels. And in order to carry the must-haves, distributors must also carry the low-demand channels. "As a consequence ... distributors can offer consumers only prepackaged tiers of cable channels which consist of each programmer's entire offering of channels," the complaint said.

The appeals court said that while the subscribers may have felt that they were injured by the tying, they did not prove injury to competition.
Cablevision has just 3.5 million households in its coverage area, which is the media-hub tri-state area of New York, New Jersey and Connecticut. That’s a far cry from Comcast and its 24+ million customers. But the lawsuit could have big ramifications for Viacom and the rest of the industry should the court find against it. Specifically, making tying illegal would mean far less carriage for its low-rated networks, throwing off the entire business model; and in turn, that translates to less revenue in the form of carriage fees, which often make up for ratings slumps and advertising dips from quarter to quarter. Carriage fee revenue for Big Media has gone up consistently over the last few years.
However, a Viacom loss could be a huge boon for second-tier networks that don't have the backing of a large media company. These networks are feeling anti-competitive effects from tying, some say. "It would be like me saying, 'I'll sell you a Snickers and a Baby Ruth along with some Jujubes for $3.25. But if you just want the Snickers and the Baby Ruth, it's $10,000,'" Ovation COO Chad Gutstein told Barry. "Again, for us, it further prevents a level playing field on which Ovation can compete against some of those second-tier networks that are owned by Viacom. Whether it's VH1 Classic or CENTRIC or LOGO or Palladia, these are all networks that Ovation competes against for programming rights, for viewership, for advertiser dollars, for distribution, for affiliate fees. We compete against them every single day, and if it were a level playing field, we think we would win."