Blackout looms in Time Warner, Viacom standoff

NEW YORK Wed Dec 31, 2008 8:14pm GMT

NEW YORK (Reuters) - Viacom Inc and Time Warner Cable were at a standoff on Wednesday, but hoped that top executives would step in to resolve a dispute that threatens to prevent more than 13 million U.S. subscribers from seeing shows like "Dora the Explorer" and Jon Stewart's "The Daily Show".

No face-to-face meetings between executives have occurred for several weeks, sources on both sides said.

At issue is an extra $35 million to $40 million that Viacom wants Time Warner to pay for carrying its cable channels, including MTV, Comedy Central and Nickelodeon.

Time Warner has refused, saying the economic climate makes it impossible to pass along such costs to its customers. Viacom has denied Time Warner's request for an extension of the current terms.

Instead, Viacom threatened to pull its TV networks from Time Warner at midnight on January 1 unless a deal was reached. Viacom also wants Time Warner Cable's Chief Executive Glenn Britt to become more active in the talks, sources said.

Although disagreements between cable carriers and programmers are common, this one is particularly notable given it involves two major companies, threatens top shows, and has prompted a high-profile advertising campaign.

Time Warner is a major outlet for programmers with its 13.3 million video subscribers and presence in New York, Los Angeles, Dallas and Cleveland.

But Viacom has an equally strong hand. It controls 19 cable TV networks that offer "SpongeBob SquarePants," "The Hills", "Dora the Explorer" and "The Daily Show with Jon Stewart" among others.

Viacom has taken its case to the public in an ad campaign.

"Why is Dora crying?" read an advertisement Viacom placed in The New York Times. "Time Warner is taking Dora off the air tonight! Along with 19 of your favorite channels."

HIGH STAKES STANDOFF

Affiliate fees have become even more important as the recession has crimped advertising revenue.

But neither side is well-positioned for a long standoff. Time Warner Cable is about to lose the protection of parent company Time Warner Inc with a planned split off in early 2009. Viacom has come under scrutiny as its controlling shareholder, mogul Sumner Redstone, faces his own debt crunch.

"As has been the norm, we would expect a settlement -- terms undisclosed -- in a relatively quick manner, as both sides may not want to see if this battle results in mutually assured destruction, as Viacom loses ad dollars and Time Warner loses subscribers," wrote Bernstein analyst Michael Nathanson.

Viacom is arguing that it deserves more money because viewers spend more than 20 percent of their time with its networks, but its fees amount to less than 2.5 percent of Time Warner's revenues from customers.

"We sympathize with the fact that Viacom`s advertising business is suffering and that their networks` ratings have largely been declining," Time Warner's Britt said in a statement. "However, we can't abide their attempt to make up their lost revenue on the backs of Time Warner Cable customers."

Like other cable and satellite operators, Time Warner has been under pressure from program makers who are keen to increase their fees. Until now, it has largely been broadcasters like CBS who have complained.

Time Warner also needs to keep down its programing costs, the single biggest expense at around $4 billion a year, and faces a slowdown in consumer spending on add-on products like HD digital video recorders.

Viacom, with about 30 percent of its revenue coming from advertising, announced plans to cut about 7 percent of its staff. Its shares were down about 60 percent in 2008.

Part of the share drop can be attributed to worries about Redstone, who has been forced to sell Viacom stock to cope with a debt crunch elsewhere in his media empire, analysts said.

(Reporting by Yinka Adegoke and Paul Thomasch, editing by Leslie Gevirtz)