Skip to main content

Comcast (CMCSA) - Get Comcast Corporation Class A Report is getting with the programming.

The nation's largest cable operator, engorged by its Monday merger with


(T) - Get AT&T Inc. Report

AT&T Broadband, is suing a subsidiary of cable TV programmer

Liberty Media

(L) - Get Loews Corporation Report

, Liberty said late Tuesday.

The lawsuit, which Liberty says was filed under seal in federal court in Pennsylvania, signals that Comcast is wasting no time in its effort to cut costs and improve margins at AT&T's former cable subsidiary. In the face of perpetual upward pressure on cable programming prices, the suit appears to be Comcast's quick first step toward the goal it articulated last December of cutting programming costs to improve earnings before interest, taxes, depreciation and amortization, a common bottom-line yardstick for the cable industry.

TheStreet Recommends

Comcast didn't respond to a request for comment Wednesday morning. Liberty says it will "vigorously contest" the suit, which seeks to change the terms under which the former AT&T systems will pay for certain Liberty-supplied cable channels.

On Wednesday, Liberty's shares fell 7 cents to $9.43. Comcast's Class A shares, which have replaced its Class A Special shares (CMCSK) on the

S&P 500

Index, fell $1 to $24.

Legends of the Fall

In addition to Comcast's launch of an AT&T Broadband turnaround, the lawsuit also spotlights the legendary reputation for dealmaking enjoyed by Liberty Media chairman John Malone, who stood behind the scenes of the disputed programming deal when it was first concocted more than five years ago. That's because the disputed programming agreement which Comcast inherited was originally between Liberty and its then-parent, the cable operator Tele-Communications Inc., which Malone then controlled and later sold to AT&T.

At issue are the terms under which the former AT&T Broadband systems now under Comcast's domain will pay to carry the Starz and Encore premium movie channels owned by Liberty. In the 1997 deal between TCI and its Liberty subsidiary, TCI signed up for a 25-year affiliation agreement in which it agreed to pay Liberty's Starz Encore Group fixed amounts ranging from $270 million in 1998 to $360 million in 2003.

That's not a typical transaction, says one longtime cable industry observer who requested anonymity. Not only are affiliation agreements usually structured on a per-subscriber basis rather than fixed rates, says the observer, but a 25-year deal is "phenomenal" in an industry where programmers are considered extremely fortunate if they can land 10-year agreements.

AT&T, which acquired TCI subsequent to the Starz Encore affiliation deal, started protesting certain terms of the agreement in May 2001; in response, Starz Encore sued AT&T for breach of contract that July. Liberty and AT&T Broadband agreed to table their litigation -- first in an attempt to settle the agreement, then, to wait for the outcome of the Comcast-AT&T Broadband deal. Now that that transaction has closed, the fight has begun again in a new arena.

What Comcast believes are appropriate affiliation terms with Starz Encore, and whether Comcast is interested in carrying the channels at all, are both unknown. But executives at Comcast and AT&T Broadband said last December that they hoped that programming cost cuts at the merged company could improve EBITDA by $450 million annually -- a figure just under 10% of the pro forma EBITDA expected for the new Comcast this year.

Whatever the nature of the Starz Encore dispute, it's not the only entanglement between the two companies. Notably, Comcast and Liberty share ownership of the QVC home shopping channel.