AT&T U-verse Drops Hallmark, as Carriage Wars Rage (updated)

Retransmission debates dissolve into attack ads and name-calling as cable companies and content providers fight to maintain profits

Last Updated: March 3, 2011 @ 1:41 PM

Update Wednesday a.m.:

AT&T U-verse dropped the Hallmark Channel and Hallmark Movie Channel at 12:01 a.m. ET Wednesday in a dispute over fees.

In a statement Wednesday, AT&T said Hallmark owner Crown Media Holdings has not offered a "fair deal."

"We offered to extend the current deal while talks continued, and Hallmark rejected that offer," according to AT&T's statement. "We don't want customers to lose their programming, but we believe strongly that our customers should not have to pay more than their fair share for Hallmark's channels, which is exactly what Hallmark is demanding."

The channels each 2.5 million AT&T U-verse customers.

Crown CEO Bill Abbott said in a statement he was "stunned by (AT&T's) apparent disregard for facts."

The move came as Time Warner Cable and Disney make progress toward resolving their own carriage fee negotiation dispute. The media giants look close to reaching a deal in time for Thursday's college football kickoff, key programming for Disney's ESPN unit.

Negotiations between AT&T and Hallmark broke off Aug. 26. At the time, Abbott accused AT&T of "bullying one of the nation’s last surviving independent cable networks by insisting on unreasonable rates that would seriously jeopardize our longevity."

Crown is willing to restart negotiations at any time, Abbott said Wednesday.

AT&T notified its customers Aug.1 via postcard that the channels might go dark.

Previously:

The current carriage dispute between Disney and Time Warner is nearing a resolution, but the kind of high-stakes brinksmanship the two media giants engaged in throughout this month is here to stay.

Over the past year, debates between cable companies and content providers — once the province of the board room and the executive suite — have increasingly played out in the public eye.

As the latest battle demonstrates, it is now de rigueur for media companies to prey on their customers' fears or sympathies.

That can mean anything from dire warnings about big events being missed to attack ads to websites designed to keep customers "informed" of the progress of talks.

“Both sides see the benefit of making disputes public as possible,” Kurt Scherf, an analyst with consumer research firm Parks Associates, told TheWrap. “They’re using the power of social networking and message boards to get out in front of customers”

“It’s a literal game of chicken and both sides have a lot to lose,” said Larry Gerbrandt, a cable analyst and consultant with Media Valuation Partners.

Over the past year, TV watchers have looked on in horror as fights between companies such as Time Warner and Fox, AT&T and Rainbow Media and Disney and Cablevision have threatened to blackout the Oscars or the premieres of hit shows such as “Mad Men.” In most cases, disaster has been averted before the threatened plug pulling — though the battle between Disney and Cablevision went so far down to the wire that 3 million New York-area homes missed the first 15 minutes of this year's Academy Awards.

True to form, Disney and Time Warner look likely to reach an agreement just in time for Thursday’s deadline, which not so coincidentally marks the start of college football season on ESPN. But more squabbles are on the horizon. In particular, Fox and Cablevision will likely engage in a high-profile spat when their existing agreement comes due this October. That dispute will take place just in time for the World Series to serve as a costly bargaining chip.

The only cable provider who seems to have conducted the bulk of its retransmission negotiations in the shadows is Comcast. As the recent 10-year pact it signed with CBS shows, the country's largest cable provider has thus far decided to forgo the public option.

The reasons for the fractious negotiations are myriad, but the big losers in the public feuds are consumers. The rising cost of retransmission fees paid out to broadcasters by cable providers will almost certainly be passed down the line.

During a severe recession, that could spell trouble.

‘They’re playing a dangerous game because their actions could lead to a breakdown of the current distribution eco-system that’s served them so well. If prices increase much more, we could see an acceleration of cord cutting,” Christopher Marangi, a media analyst with GAMCO Investors, told TheWrap.

There are already signs that consumers are balking at the higher prices. Cable suffered its worst losses in history in the last quarater, as major providers shed some 711,000 video subscribers. As consumers guard their checkbooks more closely, many are opting for cheaper alternatives to cable such as Hulu and Netflix’s growing video-streaming business.

Yet content creators are between a rock and a hard place. The decline in ad revenue has left many networks scrambling to maintain their profit margins and find alternative revenue streams.

“It’s been a horrible year for media, and that’s impacted broadcast networks. It’s still just as expensive to make shows that people want to watch like ‘House,’ so these companies need to find something to prop up their economic models,” Robin Flynn, a cable and media analyst at SNL Kagan told TheWrap.

That said, it remains the content creators who have the upper hand. Not many subscribers would be willing to hang on, for example, with a Time Warner Cable that doesn't offer ABC or ESPN.

“Unlike in the free enterprise system, where you can go out to multiple suppliers and play them off each other, programming brands are unique, especially sports," Gerbrandt said. "You’re not going to go out and duplicate the NFL, and as long as that’s the case, then ESPN carries the force of NFL games.”

“Right now, cable operators have no leverage. The networks can keep demanding more and more,” Steve Effros, a cable analyst and consultant, told TheWrap.

The need for some sort of compromise may be evident, but it doesn’t explain why negotiations have devolved into public name-calling. In fact, anxiety over the tectonic changes gripping the home entertainment industry and the increasingly fragmented distribution landscape is seeping into the dealmaking and causing tempers to flare, analysts note.

Says Parks Associates' Schef: “Both sides are feeling the heat concerning the future of this audience and both sides are acting aggressively to lock in favorable terms in an era of uncertainty."

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