NEW YORK (Hollywood Reporter) - While the war of words seems over in carriage fee negotiations between industry giants Disney and Time Warner Cable, the war for subscribers isn't.
The University of Southern California opens its season against Hawaii on Thursday night, and Verizon's FiOS TV service has recently warned football fans in Los Angeles that they must sign up -- and drop their TWC subscription -- if they want to be 100 percent sure that they can watch the game.
The aggressive ad campaign in markets where FiOS overlaps with TW Cable, such as in L.A., has appeared in newspapers and on TV and radio, including, of all places, Disney's ESPN Radio. It's a sign of how heated the competition between TV distributors is these days and how contentious carriage fee talks with content providers have become.
That said, FiOS may be running out of luck as Disney and TWC seem to have averted what would have been the year's biggest TV carriage dispute. With their contract expiring Thursday morning right after midnight, the companies have agreed on the framework of a new deal and cooled off what had been a heated public relations battle.
With the new TV season and the kickoff of the NFL season looming, the talks had the potential to be particularly disruptive, and ESPN boss George Bodenheimer was recently recalled from his vacation to return to the bargaining table and help hammer out a deal.
Notices on two websites maintained by the companies to keep their customers informed on the talks have been updated to say: "The Walt Disney Co. and Time Warner Cable have made significant progress in our negotiations for continued distribution of ABC, Disney and ESPN networks and services. We are now focusing all our attention on a successful conclusion of these efforts prior to the September 2 deadline."
Such updates typically mean that a TV network operator and a distributor have agreed on the outlines of a deal and are putting legal and other finishing touches on it. One source said if a final deal is not reached and announced by end of day Wednesday or early Thursday, the companies could complete it shortly thereafter without programing disruptions.
As always, executives on both sides are reluctant to discuss terms of the likely deal. Both are powerful firms, but some have argued that Disney has somewhat of a negotiating edge. Gimme Credit analyst Dave Novosel in a report last week put it more aggressively than most, saying a deal will "in all likelihood be bad for TWC, although how bad is not entirely clear."
After all, Disney's ESPN is not only must-have content, but it's by far the most expensive network, costing distributors $4.40 per subscriber per month this year, up from $3.30 in 2006, with only the new ESPN 3D coming close at an estimated $2.55, according to SNL Kagan estimates.
The Disney Channel also makes the top five channels, costing distributors 91 cents as No. 4, and Disney is believed to have pushed for a big increase. Disney is believed to have been pushing TWC for 5 percent-10 percent price increases across its networks, in line with recent years' average programing expense growth of cable and satellite TV operators.
Observers are particularly curious to find out if any details will leak on three key issues of a final agreement:
-- Will TWC, which has 12.7 million video subscribers and is the second-largest cable firm behind Comcast, drop smaller Disney networks, such as Disney XD or Disney Jr. (the new preschool service that is replacing SoapNet), so that the cable firm can offset higher costs for other networks?
Janney Montgomery Scott analyst Tony Wible estimates that high single-digit percentage increases in fees from TWC could boost Disney's annual profit by 2 cents-3 cents per share. But TWC already reported $4 billion in video programing costs for 2009, up 6.5 percent over 2008, with its cost per video subscriber amounting to $25.60 a month."
TWC expects that its video programing costs as a percentage of video revenue will continue to increase as increases in programing costs outpace growth in video revenue," the company warned this year.
On its consumer outreach website about Disney-TWC and other disputes -- dubbed RollOverOrGetTough.com -- TWC similarly explains to consumers that 40 percent of its billings goes straight to content providers, 54 percent to expenses to operate the rest of the business, and only 6 percent to the company's profit line.
Maybe, as SNL Kagan analyst Derek Baine highlighted, the direct financial comparison tells the story best: "Disney cable network margins have been expanding faster than TWC margins, showing programmers have been doing better in these negotiations," he told The Hollywood Reporter.
-- How much will TWC pay in retransmission consent fees for Disney-owned ABC stations in five markets, including the nation's two top media markets, New York and L.A., where the company owns WABC-TV and KABC?
It is the first time that Disney has asked for retrans payments from TWC, as those kind of fees weren't assessed when they struck their previous arrangement. Wible estimates that TWC will pay 40 cents-60 cents per subscribers per month. Other analysts have used a similar 50 cents estimate -- in line with what other broadcasters have fetched. Given TWC's 3.8 million customers in ABC station markets, that would amount to about $23 million a year.
-- Will TWC pay Disney for online sports service ESPN3.com (market chatter had centered on a 10 cents per broadband user per month fee), or will the content company have to directly charge consumers? (The cable firm would prefer the latter, as whoever bills people tends to get blamed for the cost.
Comcast, Cox and other distributors are already paying Disney for the site, the only one that gets payments from distributors, but TWC wants to keep its growing broadband business more profitable by avoiding fees. The Disney-TWC situation has been closely watched by the industry in a year that has seen a slew of contentious carriage renewal talks go down to the wire. The year began with a slightly delayed agreement between News Corp./Fox and TWC, followed by a Disney/ABC clash with Cablevision that left some viewers without the start of the Academy Awards broadcast. Cablevision also didn't renew an arrangement with Scripps Networks Interactive until well into the new year, and Versus went missing from DirecTV for months. Plus, AT&T U-verse has been in a war of words with Crown Media's Hallmark Channels over an extension to a carriage deal that expires at the end of the day Tuesday.
If all the traditional challenges of carriage deals weren't enough, evolving business models in the digital age have added even more dynamite. Access to TV shows on Hulu.com, Disney's talks with Apple for 99 cents TV show rentals for a 48-hour window and others all play into the equation.
"There are far more moving pieces than there have ever been, so there is more brinkmanship," cable industry veteran and consultant Steve Effros said. "And in a weak (housing market and) economy, everybody is trying to hold out for the last penny."
That's also why FiOS is trying to keep consumers aware that it is an alternative, even though analysts say only extended carriage disputes tend to bring major defections to another TV distributor.
Interestingly, satellite TV giants DirecTV and Dish Network have been quiet amid the showdown. "There is an evident interest in some semblance of a united front against very high (content) charges," Wunderlich Securities analyst Matthew Harrigan suggested as the reason.
Dish also may want to tread carefully as it faces a big year-end carriage showdown with News Corp./Fox, which is also renegotiating a retrans deal with Cablevision that comes up in October.