According to the story circulating around the cable industry, top Viacom executives were shocked--shocked!--when they called their Suddenlink counterparts at the eleventh hour on Sept. 30 and told them they were finally ready to talk turkey about a new carriage deal.
"They never saw it coming," said a pay-TV executive familiar with the failed negotiations between the St. Louis operator and the global media conglomerate. "Viacom thought it would unfold at the last minute like every other deal. But Suddenlink said, 'I don't think you understand. We gave away your real estate. There's no going back."
With Viacom demanding what sources say was a 50 percent rate increase on perhaps the biggest bundle in pay-TV, the operator had moved on to Plan B. Suddenlink replaced Viacom's 24 networks with a mix of independent channels, such as Glenn Beck's extreme right-wing-focused The Blaze, as well expansions of other conglomerate deals that brought in outlets like FXX and the Oprah Winfrey Network.
UPDATED Oct. 9, 10:40 a.m. PST: A Viacom spokesperson contacted FierceCable Thursday and said that on the day the company's previous Suddenlink carriage deal expired, Sept. 30, the conglomerate offered to take the MSO's last proposal, which called for a "single-digit" rate increase. But sources tell us that by the time that offer was acccepted by Viacom, the cable company had already committed to the other channels. END UPDATE
Speaking to FierceCable, Suddenlink spokesperson Pete Abel dismissed any notion that his company entered negotiations with Viacom intending all along to drop its channels. But there had been research conducted to support the decision.
"We listened to the voice of our customers, as expressed through calls to our care centers, surveys, and polls," he said. "The consensus was clear: Customers did not value the Viacom channels as much as they valued other channels. They did not want to pay significantly more to keep the Viacom channels. And there were a number of other channels they would like to see added. We were guided accordingly." (Viacom also disputes this claim, with a spokesperson saying the company has monitored "thousands" of complaints on social media channels from unhappy subscribers who say they weren't warned about the programming change.)
Suddenlink, of course, also followed the playbooks of other MSOs. Phoenix-based Cable One, for example, ditched Viacom in April with a similar alternative programming plan.
UPDATED Oct. 9, 5:45 p.m. PST: According to the unnamed cable industry executive I spoke to Wednesday, Cable One only lost about 2 percent of its nearly 500,000 remaining video subscribers due to the loss of Viacom Networks. This, of course, is an imprecise estimate made amid a trend of consistent subscriber losses for the operator over the last several years. Viacom correctly notes that Cable One's video subscriber losses tripled from 12,418 in Q2 2013 to 34,254 in Q2 2014, an uptick from around 2 percent of total subs to over 6 percent in the quarter they pulled Viacom's networks. How many of those customers quit because they could no longer receive Viacom's shows? Tough to say exactly. Regardless of what number actually is, it doesn't appear to be freaking Cable One out.
For Graham Holdings, Cable One's parent, the business priority--as communicated in its second quarter earnings release in August--isn't driving video subscriber growth, it's pushing down programming costs and building its broadband business. "Due to rapidly rising programming costs and shrinking margins, video sales now have less value and emphasis," the company told its investors. END UPDATE
For Viacom, which according to reports just beat Sony to a pulp in negotiations to put its channels on the Japanese conglomerate's upcoming OTT pay-TV service, it was all small potatoes … at least until Suddenlink pulled the plug.
For its fiscal third quarter ended June 30, the conglomerate posted a 1 percent rise in media networks revenue to just over $2.59 billion. Losing out on nearly 1.5 million Suddenlink subscribers, however, will make year-to-year comparisons tougher.
"And these are the subscribers who yield the highest fees," the cable exec pointed out, "since the smallest MSOs have to pay the highest prices."
Breaking down the deal dynamics, it's tough to understand how Viacom could have anticipated a significant fee bump with an MSO that's largely situated in regions like Texas--places where signature Viacom assets, like Comedy Central personalities Jon Stewart and Stephen Colbert, aren't necessarily must-see pay-TV programming. Viacom executives stridently refute this notion, with a spokesperson telling me Thursday that the conglomerate's programming generated one-third of all free VOD viewing Suddenlink before it was pulled.
But the cable industry now has a pretty standard wrap when it comes to denigrating and devaluing the conglonmerate's bundled offering, with one cable executive noting, "Viacom doesn't have live sports, its programming is all over other platforms like Netflix (NASDAQ: NFLX), and its networks don't match Suddenlink's footprint that well. [Suddenlink was] thinking, if I have to cut from somewhere, I'll go after the one bundle I can drop that won't cripple my company. They did the math."
Abel wouldn't share that math with me, but the anonymous cable executive engaged in some speculative arithmetic:
Let's assume Suddenlink lost 2 percent of its nearly 1.4 million subscribers, just like Cable One allegedly did. (Again, that number is disputed by Viacom, but we're using it for the sake of argument.) And each of those nearly 28,000 subscribers is worth around $4,000 to the company. Estimating Viacom's fees to account for 10 percent of a speculative overall program licensing nut of around $700 million before any rate incease, the MSO saves around $100 million in licensing fees (not accounting for alternative programming expenditures).
"They end up about breaking even in year one and actually saving money by the second year," the executive explains. "They made a really good decision."--Daniel