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Announcement:

Moody's says Disney/ABC - Cablevision dispute won't be the last for pay TV industry

08 Mar 2010

New York, March 08, 2010 -- Moody's Investors Service said that a recent dispute between The Walt Disney Company (A2, stable) and Cablevision Systems Corporation (Ba2, stable) was resolved more quickly than expected (albeit not in time for viewers to catch the opening monologue of the Academy Awards), but that there are certain to be more public squirmishes amongst content providers, broadcasters and pay-TV distribution companies in the coming months and years.

In yet another high profile contract negotiation between a cable company and a broadcaster (this time one whose owner also owns a major broadcast network and substantial programming content), Disney and Cablevision remained at an impasse for more than 20 hours yesterday before making "significant (enough) progress (in their negotiations)" to restore broadcast carriage of ABC-7 to almost 3.1 million Cablevision customers in and around the New York metropolitan area market. "In Moody's estimation, we believe this translates into an Oscar win for Cablevision as the likely victor, this time around," said Senior Vice President Russell Solomon.

Like News Corp (Baa1, stable) in its recent dispute with Time Warner Cable, Inc. (Baa2, stable) over retransmission fees for its owned Fox TV stations just prior to The Sugar Bowl earlier this year, Disney presumably ceded more ground than it would have liked in the settlement, albeit also likely on a short-term basis (one year vs. the more typical three). If not, Cablevision's track record suggests that a blackout of the ABC TV station programming would have almost certainly continued, and potentially on more than just a short-term basis (as evidenced in January when it failed to agree on carriage terms for Scripps Network Interactive Inc.'s (Baa1, stable) Food Network and HGTV channels, which went off the air for three weeks). Odds were high that Cablevision would have to pay something, but the relatively quick resumption of signal carriage (particularly during the broadcast of such a premiere television event and prior to a firm agreement being in place) suggests they are leaning towards something less (and potentially far less) than Disney's initial demand. Either way, the outcome of this very public dispute will be widely watched (even though final terms are usually kept very private) and has the potential to be precedent setting for the entire pay television industry.

For Cablevision, the credit implication of losing ABC-7, particularly ahead of the Academy Awards show, is negative because at least some of the cable company's customers were given one more reason to consider joining their neighbors in defecting to an alternative pay-TV service provider, of which there several, as they undoubtedly have grown increasingly tired of these blackouts and threats of the same. We believe that Cablevision's rivals may have modestly benefited from this latest stand-off -- principally Verizon Communications Inc. (A3, stable) with its advanced FiOS fiber optic TV service, although less so than if the programming had not been restored so quickly.

For Disney, the credit implication remains largely neutral either way because the ABC network and its New York station are only a small part of Disney's overall business. Still, with another big carriage fee fight with Time Warner Cable Inc. (Baa2, stable) expected this summer, Disney wanted to set a precedent by "winning" the fight with Cablevision, collecting something and establishing at least a baseline pricing level for its high quality programming. And the ramifications for upcoming contract renewals with other pay-TV distributors, which now notably include telephone companies in addition to direct broadcast satellite companies, incumbent cable companies and their rivals, could be more far-reaching.

At stake are hundreds of millions of dollars in fees each year that the station affiliates of ABC, CBS, NBC and Fox are demanding (and increasingly getting) from the pay-TV industry in exchange for carrying local and network-TV programming over cable-TV networks. In the latest dispute involving Cablevision, the fees Disney sought for the lone ABC-7 channel amounted to a reported $1 per subscriber, or some $40 million a year, according to Cablevision -- not a significant amount on its own but one that could add up over the long term if the major networks continue to gain momentum and begin winning more of these fights.

"We think the major broadcast stations will be the bigger winners in their collective bid to build an incremental affiliate-fee revenue stream, which will serve to partially mitigate their exposure to the volatile advertising markets," noted Solomon. This is mainly because they have some of the most popular programming content that the cable- and other pay-TV companies need in order to keep subscribers and stay competitive.

Ultimately, though, the biggest losers will be consumers as the pay-TV companies invariably raise prices for existing programming packages to offset the added fees. While the situation is far from new, this high-profile dispute has heightened awareness of all affected parties, with some politicians calling for regulatory intervention and others vowing to stay out of the fight, and consumers caught in the middle.

There's more to come, for sure, so stay tuned.

New York
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Alexandra S. Parker
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's says Disney/ABC - Cablevision dispute won't be the last for pay TV industry
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