For MSOs, competition no longer just means DBS. Whether it’s nascent telco video franchises or streaming downloads of The Daily Show to iPods, programmers are finding more outlets for their wares. In a set of separate interviews with Andrew Grossman, our trio of top network affiliate sales executives—Sean Bratches, EVP, affiliate sales/marketing, ESPN; Gregg Hill, president, Rainbow Network Sales; and Lindsay Gardner, EVP, affiliate sales/marketing, Fox Cable Networks—argue these new "disruptive" technologies are good for MSOs. CableWorld: Have your relationships with MSOs changed as a result of heightened competition to cable? Has it afforded you more negotiating leverage? Lindsay Gardner: It hasn’t changed the dynamics of negotiations yet. For at least 10 years there have been multiple outlets for our content. When Verizon and SBC deploy in a community, instead of being three choices for our content there may be four. Yes, there are greater tensions in terms of competition for the consumer entertainment dollar and time. On the other side, the consumption of media is at an all-time high and growing dramatically. There are more opportunities than ever to sell more content to consumers on an increasing array of dimensions. That will mean more time, eyeballs and money coming out of every home in the country. Same question, Sean. Have relations with MSOs changed due to heightened competition to cable? Do you have more negotiating leverage? Sean Bratches: We don’t look at it from the perspective of leverage. Directionally our interests are very aligned. Much of the discourse about rates has been resolved amicably and we’re moving onto other productive things. We’re having ongoing conversations with our affiliates as we expand the amount of content that is going to each. This is going to be a big year, notwithstanding this has been said before and hasn’t come true; 2006 and 2007 are going to be seminal years for the interactive television world. Come on, Lindsay, Fox doesn’t leverage its huge array of assets as a programmer and distributor in talks with MSOs? Gardner: We are more likely today to be talking about new technology and the disruptive impact of these new technologies and the opportunities of these new technologies as we are hustling over license fees. Distributors and programmers see enormous opportunities and challenges in the technological change that has old and new media colliding. That’s the main event these days, not getting more money for FX. A lot of this reflects more rhetoric than marketplace reality. If our channels resonate with consumers and communities of consumers extreme sports aficionados for Fuel TV or people who need their dose of American Idol Extra from Fox Reality Channel then our channels will have marketplace power. And they’ve always had marketplace power whether there are one, two or three alternatives to cable. What about your VOD deal with DirecTV that gives subs access to new shows 48 hours in advance for $2.99? Have you offered that package to cable operators, Lindsay? Gardner: Yes, we’re negotiating the same deals with other distributors, including Dish. Do MSOs seem interested? Gardner: Yes. What did you take away from the Dish/Lifetime dispute? Could it stiffen MSOs’ resolve on license fees, or was it a one-off due to the unusual retransmission consent arrangement with Lifetime and its broadcast station owners? Gardner: The market wills out. One of the things that we have to be prepared for is that our networks ultimately earn their place in a distributor’s lineup. There are no givens. Even retransmission consent is no panacea. You are beginning to see some networks, like Trio, OLN and like Lifetime, get dropped without too much outcry. The same is true on the distributor side. If the distributor chooses not to carry a certain channel that resonates in a passionate way with a given group of consumers they had better be prepared to deal with the consequences, too. Sean, Disney is getting pushback from MSOs who are complaining about paying additional fees for your on-demand content, for cable and online. The feeling among many is they pay you enough as is. Bratches: We feel strongly we want to support the last mile, the broadband infrastructures our affiliates have invested heavily in. To the extent we populate the free broadband Internet with this content, the value proposition is lost to the consumer back to the affiliate. Having our content, like ESPN 360 or Disney Connection, resident in the head-end or the switch improves the quality to the consumer because it’s not going through the Internet and not subject to the traffic and the buffering of the Internet. It also derives a direct relationship from a value standpoint from the affiliate because it’s the only way they can get it. Sean, it seems this strategy is taking a bit of time to gain acceptance. Bratches: These things as a course of business take some time and in many respects we have to prove our value. We perceive this as being a marathon and not a sprint and a directional business model we think will best support the Walt Disney Co. over the long term. Most [MSOs] are still working on what they perceive to be the optimal business plan for video on demand. There are certain affiliates in the market who have a defined point of view that is somewhat inconsistent with the way we see the world, but we continue to talk on multiple fronts and we’re confident we’ll come to an agreement with everyone. We’re not opposed to free VOD to the consumer. We’re just opposed to provisioning it to the affiliate for free. Gregg, why should an operator license Rainbow VOD content, like Mag Rack and Sportskool, rather than follow the free VOD model of Comcast? Gregg Hill: You need to have content that is compelling, that is going to drive viewership. With Mag Rack [and] Sportskool, we have name celebrities now and we’re using that to drive viewership. We focused originally on branded content with VOD. We didn’t take existing content—content we were already distributing—dress it up and give it back on another platform. We didn’t do that when we started diginets. We didn’t do that when we started VOD. Rainbow creates real products of real value for each platform, and that’s a lot different than what you see with other companies. But those other companies are able to spread the costs of programming over several platforms. Hill: Yes, you can take an asset off my expanded basic channels and put it on my diginet. Now I charge my operator again. OK, for me, who owns that asset. If I was going to amortize it over five years, now I can amortize it over 10 years, so the cost of that program just dropped dramatically. Now I put it on VOD and its useful life span is 15 years. That program is not costing much and now I’m charging the distributor and picking up a fee in each platform. That’s really great—for the programmer. But are you really investing in those channels? Some of those channels don’t have brands, and I look at the ratings and I’m glad I don’t work there. I’m glad I have brands that are strong and brands with the platforms that they are on, that the operators really need. Gregg, would Rainbow make a VOD deal with Comcast for AMC and WE? Hill: We’re not opposed to that. We haven’t done it yet. We have a very open mind. We could see doing a VOD product for AMC and WE. We’ve been focused on creating real value. Providing what the cable operators really need: complete content in VOD that their competitors can’t get because they are technologically prohibited from getting it, at least up to this point. Gregg, is Rainbow having serious talks with companies like Google about streaming your networks on other platforms? Hill: No. That’s not something we’re spending a lot of time on today. We’re very operator focused. We know who we are and how we got here. Gardner: We’re talking and negotiating with everyone. Our strategy is more focused on getting it right, doing things where we learn, getting a number of oars in the water in the right places as opposed to putting out a lot of press releases. There is a common desire among all of us to get out there and learn and to have an impact, but our industry has yet to coalesce around a single business model in each of these nonlinear categories. During this period we believe it’s important to test and deploy a number of product offerings. Things are going to happen faster than most people imagine, but it’s not because of a sense of urgency on our part. This recent wave of innovation is unusual because it is being driven by consumers. Gregg, Comcast and Cablevision have launched IFC in Theaters, a day-and-date theatrical release over VOD. What about other MSOs? Hill: They are jumping all over it. I haven’t had anyone push back yet. We’ll get our DBS deals done. We’re talking to Verizon. I’m meeting with everyone as fast I can. Should operators feel threatened from the telcos, Googles and DirecTV? Bratches: If you look at new technology like iPods, it’s acting as a stimulus to drive viewing. DVDs are driving people back to core food chains. The iPod deal the Walt Disney Co. has done with Apple is a case in point on that. For these new technologies to work and thrive the core product and the core platform needs to be strong whether it’s Desperate Housewives or SportsCenter. Our content on iPods that has been released on DVD have been growing from the linear platform from which they have been derived. Lindsay, same question. Gardner: The best distributors start with the consumer, with what their consumers want. Increasingly consumers want to dictate the time and the place that they consume entertainment programming. The smartest distributors and programmers are embracing this. The ones you will one day read about in the corporate obituaries are resisting it and are whining about the risk of these disruptive technologies to their core businesses. In the coming years these deals will be commonplace and easy to do and will be turnkey. Today these deals are new to the profit participants. They require a great deal of work on the front end to secure the rights and to make all these internal and external constituencies comfortable. Our ambition is to deliver what consumers want…high-production content is what moves the meter in the nonlinear space.

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