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Jeremy Lin Blackout Began With Cablevision Spin (Update 3)

Updated to reflect New York state attorney general statement and closing stock prices.

NEW YORK ( TheStreet) -- Cablevision's (CVC - Get Report) 2010 decision to spin off Madison Square Garden (MSG - Get Report) helped shareholders reap giant rewards, but "boobirds" may be emerging if some of those investors are Time Warner Cable (TWC - Get Report) customers.

That's because the spinoff made possible an extended standoff between MSG and Time Warner Cable that's made many in the New York area miss the biggest Knicks drama in a generation, even if investors are profiting from a record MSG share surge.

Jeremy Lin has led the New York Knicks to eight straight victories.

The programming standoff between Time Warner Cable and MSG caused over 2 million New York subscribers to miss the Jeremy Lin-fueled Knicks surge. But the blackout is over, according to Eric Schneiderman, New York's attorney general . The New York Times reported earlier on Friday that he and Gov. Andrew M. Cuomo to help Time Warner and MSG broker a settlement. A Time Warner Cable spokesperson confirmed the settlement, without disclosing details.

"Our office has worked diligently with Time Warner Cable and MSG Networks over the last month to bring about a resolution to their dispute. We are pleased that both parties have reached an agreement that will finally allow Knicks, Rangers, and Sabres fans to enjoy the rest of this season's games," said Schneiderman in a statement.

Nevertheless, the nexus of the 48-day standoff that frustrated New York cable customers is in part due to Cablevision's 2010 spinoff.

"Had Cablevision not spun off MSG, I doubt there would be a dispute," said Roger Noll, a professor of economics at Stanford University prior to the carriage settlement. Noll explains that's because the Federal Communications Commission wouldn't allow Cablevision to hold out programming like the Knicks and New York Rangers from competitor cable systems for an extended period.

"In the past, the FCC has imposed compulsory arbitration," said Noll of programming carriage settlements between cable companies that own programming networks. For instance, after News Corp. (NWSA) bought a controlling stake in satellite giant DirecTV (DTV - Get Report) in 2003, regulators forced News Corp. to arbitrate disputes with carriers of its programming.

That agreement made it impossible for Rupert Murdoch's media empire to use DirecTV to extract higher rates for its Fox programming from cable and satellite systems like Dish Network (DISH) and Comcast (CMCSA - Get Report). In Comcast's 2009 NBC Universal joint venture with General Electric (GE), the nation's largest cable company made similar assurances.

The FCC also compelled a similar settlement of high definition carriage in an arbitration between Cablevision and Verizon (VZ) FiOS.

But an independent network can duke it out. It's why MSG and Time Warner Cable were locked in a 2012 stall on negotiating a distribution package for MSG and MSG+ sports programming.

As a result, the standoff benched Knicks star Jeremy Lin in many New York living rooms. MSG also isn't carried on DISH Network (DISH) after similar talks failed.

Since the spin, Cablevision shares have struggled, culminating with a late 2011 stock fall after the resignation of the company's widely respected Chief Operating Officer.

MSG shares have surged on a Jeremy Lin-fueled February stock rally, which put shares at over $33. The company's shares spiked over 3% to a record high close of $32.85 on reports of the settlement. Since the spinoff of MSG in Feb. 2010, Cablevision shares have plummeted over 40%, while MSG shares are up over 60%.

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The spinoff pick and roll that freed up MSG to battle Time Warner isn't to say that Time Warner Cable is blameless as the two parties finalize negotiations on what's thought to be a multi-year distribution package for the Knicks and Rangers that may result in a 50% programming price increase over a 5 year-plus contract.

Time Warner Cable has said that MSG was asking for a 53% price increase, a point MSG contests.

"I do think that in defense of MSG, Time Warner Cable is exaggerating the price increase," said Martin Pyykkonen, an analyst with Wedge Partners prior to Friday's settlement. He expects a price increase that will be in line with what the roughly 70% boost that the National Football League is charging Fox, CBS (CBS) and ESPN for football broadcast rights, a 10% yearly price increase.

Since the carriage battle made it on public airwaves and a deal broke down at the end of 2011, the upper hand may have shifted with the emergence of Lin. Time Warner Cable is the second largest cable network in the U.S. and its 2.8 million New York area customers are a key market for MSG's programming. But with Lin turning the Knicks from a missable underperformer to a must see sports drama in a matter of days, MSG may have gained the advantage.

"With a 70% increase in MSG ratings and the increased likelihood that the Knicks make the Playoffs, negotiating leverage has tilted towards MSG," wrote Collins Stewart analyst Thomas Eagan in a Feb. 15 note. Time Warner still may be in a better negotiating position. "MSG needs TWC more than TWC needs MSG," added Eagan.

For more on Jeremy Lin, see why he is a $170 million man and ways to trade on Linsanity.

Linsanity will continue at Madison Square Garden on Friday night, as the Knicks look for their ninth consecutive win in a battle against the New Orleans Hornets. According to New York Times reports, that game is set to be broadcast to Time Warner Cable customers. Details on the reported settlement haven't yet been released by MSG or Time Warner Cable.

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