Time Warner Cable Jumps as CBS Fight Goes Public

NEW YORK ( TheStreet) -- Time Warner Cable ( TWC) was gaining the most in five weeks in New York after the cable-TV provider accused CBS ( CBS) of price gouging in their own contract negotiations.

Time Warner shares were rising 2.3% to $116.32 on Friday while CBS was slumping 1.9% to $52.51.

In a statement made public on Thursday, Time Warner Cable said CBS is demanding the cable-TV operator pay fees to carry the network's programming in New York Los Angeles and Dallas that are 600% higher than what the television network charges elsewhere in the country. The company said "it's unreasonable to expect our subscribers and Time Warner Cable to pay that price and we are negotiating very hard for a reasonable price."

In response, CBS began running advertisements in those three cities warning viewers that they may lose access to popular shows such as Under the Dome and Big Brother if Time Warner Cable fails to meet their demands.

At the root of the dispute is the question of the value of local television programming. Networks such as CBS as well as other content creators argue that cable-TV providers are reaping the benefits of the surge in higher-quality television programming viewership bolstered by portable devices.

CBS contends that Time Warner is refusing to agree to a so-called retransmission contraact similar to others the network has signed with other cable-TV providers. The retransmission contract sets the fees that Time Warner Cable pays CBS to carry its programming at its local-affiliated televisions stations.

The spat between the companies that each carry market capitalizations of around $33 billion was sparked when the two sides were unable to agree on a new re-transmission consent agreement by a June 30 deadline, forcing them to settle for a contract extension due to expire on July 24. CBS says it has never been dropped by a cable-TV provider because of a retransmission dispute.

The apparent breakdown in talks makes clear that CBS is ready to call Time Warner Cable's bluff and dare the cable-TV provider not to air its programming, thereby risking the wrath of angry subscribers, said Wells Fargo analyst Marci Ryvicker in an analyst note published today.

"CBS means business,'' she wrote. "CBS doesn't usually ''ruffle any feathers'' when it comes to retransmission consent (or even reverse comp) negotiations. Clearly this has changed given last night's news."

And CBS is right to do so, Ryvicker added. the Wells Fargo analyst said that given CBS' top-tier ratings -- it routinely leads networks in viewership among key demographics -- Time Warner Cable may have little choice but to pay up. Failing to do would risk Time Warner alienating about 29% of its subscribers whereas a blackout by the cable-TV provider would only affect about 10% of CBS' total audience.

CBS Chief Executive Leslie Moonves has long argued that networks, especially CBS, should be receiving more for their programming from cable-TV providers as a result of increased viewing and rising advertising rates.

Time Warner Cable, for its part, is eager to defend its profit margin as well as avoid asking subscribers for higher fees. A price hike could also risk hitting a tipping point in which more viewers seek out alternative means to watch the programming they want rather than being subjected to dozens of channels for which they have no interest.

That broadcasters say they're worth more has been strengthened in recent weeks as Gannett ( TWC) paid $1.5 billion to acquire Dallas-based Belo ( BLC) and Tribune ( TRBAA) agreed to pay $2.75 for Local TV Holdings, the privately-held owner of 19 television stations in 16 U.S. markets.

"We continue to view broadcast networks as the most undervalued content providers in the pay-TV ecosystem,'' wrote Davenport analyst Michael Morris in an investor note published today.

Written by Leon Lazaroff in New York

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