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) 2010 decision to spin off Madison Square Garden ( MSG) helped shareholders reap giant rewards, but "boobirds" may be emerging if some of those investors are Time Warner Cable ( TWC) 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) 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). 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.

The standoff may highlight far more important topics than present negotiations according to Noll of Stanford and Pyykkonen of Wedge Partners, with big implications for sports viewers and for media company investors.

Current laws don't allow for Time Warner Cable to find bypass ways of broadcasting the surging Knicks, who have won eight straight games on the ascendance of Harvard University grad Jeremy Lin, who's been selected for the "Rising Stars" game at the upcoming NBA all-star weekend.

In theory, Time Warner Cable could have negotiated with the networks of Knicks competitors like the Toronto Raptors, L.A. Lakers and the New Orleans Hornets for the rights to game broadcasts, providing a potentially cheap and quick solution to the MSG standoff that would likely get cheers from Lin-starved New Yorkers.

But that solution is blocked by a provision to the 1961 Sports Broadcasting Act that doesn't allow a cable networks to look for substitute game broadcasts. "In the absence of regulations, Time Warner Cable could sign a deal with other networks and get close to half of Knicks games," says Noll of the hypothetical. Currently, the Sports Fan Coalition, fed up with blackouts and rising costs to watch sports, is challenging the provision in a 'Petition for Rulemaking to Eliminate the Sports Blackout Rule."

In a Feb. 13 court filing, Major League Baseball weighed in on the petition. "The Sports Rule does not provide a "public subsidy" to sports leagues, as Petitioners wrongly claim. Rather, it prevents cable systems and satellite carriers from exploiting their government subsidies (the compulsory licenses) to interfere with market-based business decisions about the telecasting of games that sports clubs and leagues create at great effort, expense and risk," said the Office of the Commissioner of Baseball.

Even if the Sports Fan Coalition were to win, it would come after a torturous February for Knicks fans, and it might not stall a trend of carriage disputes between sports networks and cable and satellite systems.

"The value gap between sports programming and all other programming is widening. I would anticipate the frequency of these disputes is going to increase," says Noll of the Knicks standoff. That's because as consumers find ways to bypass most content, sports programming like the NFL, ESPN and local teams isn't easily duplicated, making carriage a high stakes game for cable systems, with networks asking for ever higher rates.

The Lin-fueled negotiations between MSG and Time Warner Cable are worth watching as a bellwether for how a new model may emerge in the cable and broadcast world, according to Pyykkonen of Wedge Partners. "If MSG wins and rates go up, it would be another dagger to the idea that rates are going up for cable companies in sports," he says.

While ESPN may cost a cable company up to $4.70 a subscriber, a highly popular entertainment channel like Food Network may only cost 50 cents, according to Pyykkonen. Because higher subscription rates to carry sports are likely to be passed onto consumers in their cable bill, it might motivate discussions of splitting sports and non-sports programming in cable packages.

Bloomberg reports that Time Warner Cable Chief Executive Glenn Britt has supported the idea of tiered cable packages that may lower the bills of subscribers not interested in sports programming.

A sports and non-sports programming split could have big implications on media companies like Disney ( DIS), Scripps Networks Interactive ( SNI), Discovery Communications ( DISCA) and NBC Universal, which is part owned by Comcast and General Electric ( GE). If that were to happen, some non-sports programming businesses might find they've been subsidized by sports in cable package arrangements.

For MSG and Time Warner, the standoff posed different risks. MSG was likely in need of an eventual deal, which will help boost waning MSG Media sales that are down on a lack of Time Warner carriage fees. In January, Miller Tabak analysts cut their sales expectations for the unit from $168 million to $125.8 million for the third quarter, reflecting an expectation an over 15% drop in revenue from 2011 on the programming dispute. Overall, Time Warner Cable business accounts for 25% of MSG's operating cash flow, according to Eagan of Collins Stewart.

Prior to MSG's Lin fueled run, MSG reported better than expected cash flow but lower than expected sales driven by the company's non-sports entertainment division, which benefited from strong Radio City Christmas Spectacular sales, according to Bank of America Merrill Lynch analysts. The sports segment reported a less than expected $24.2 million loss on expenses tied to the NBA lockout.

With Lin starring on the Knicks and the Rangers off to their best season since winning the Stanley Cup in 1994, the company may benefit from increased overall viewership and further ticket price increases in March after a 49% hike for the Knicks and a 23% bump for the Rangers in 2011.

Meanwhile, Time Warner Cable may have been more concerned about higher fees paid to MSG on a new carriage agreement than a customer exodus, even if public officials compelled a settlement. With satellite T.V. challenged in the New York area and a specialized Verizon and Cablevision footprint, many of Time Warner Cable's New York customers have limited cable options.

Time Warner Cable beat earnings estimates of $1.21 a share, according to Zacks when it reported earnings per share of $1.39 on Jan. 26.

TheStreet Ratings' price target is $88.22 for Time Warner Cable. Analysts polled by Bloomberg give MSG and Time Warner Cable $34 and $86.81 a share price targets.

For more on MSG shares see, top rated media stocks. To learn more about Time Warner Cable shares, see the highest dividend yielding media stocks.

-- Written by Antoine Gara in New York

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